Cannabis stocks are exciting for investors because of the long-term growth prospects in the sector. But investing in pot companies can also be challenging and scary, and there are a lot of potential pitfalls.
As is common in young, high-growth business sectors, there’s a lot of unprofitability in the cannabis industry as companies spend heavily to grow their businesses and gain market share. Many of these start-ups will fall by the wayside by getting acquired or going out of business. Cannabis has been illegal at all levels for decades, it’s still is federally illegal in the U.S., and an array of regulations impede the growth of this market. Pot companies, unable to access traditional means of financing, are starved for cash and often must sell their own stock to raise funds, which dilutes the holdings of earlier investors. And the COVID-19 pandemic has hampered all sorts of retail activity this year, including in the marijuana sector.
Nonetheless, there are some fantastic opportunities for people who want to invest in the legal marijuana industry.
A major funding source for cannabis businesses
Like a lot of stocks, Innovative Industrial Partners (NYSE:IIPR) crashed after the market recognized the threat that the COVID-19 pandemic posed to the economy. From a high of $137 a share last year, the stock dropped to $46 in March. However, the stock has bounced back a bit, trading above $70 a share Monday. While the company is still a small-cap, with a valuation of $1.2 billion, it arguably has the strongest financials of any company in this space. This real estate investment trust (REIT) has an incredible profit margin of 52%, while its top-line growth last quarter was an astounding 269%. As a REIT, it’s legally required to pay 90% of its taxable income to shareholders annually in the form of dividends. Its dividend yields a healthy 5.78%.
How is Innovative Industrial so profitable while so many cannabis stocks are in the red? It has skillfully taken advantage of the federal government’s stance on marijuana to acquire a lot of valuable property.
Published: April 13, 2020
Founder & Interim Editor of L.A. Cannabis News