There's no doubt that the cannabis industry is growing and has the potential to be lucrative for investors for decades to come. Legal cannabis sales were estimated to be $20 billion in 2020 and are projected to grow to over $40 billion by 2025.
While the legal and regulatory challenges are risks that must be considered, there are two stocks that are positioned to reward investors in spite of these headwinds.
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1. Cultivating the cannabis experience
Planet 13 Holdings (PLNH -3.18%) is taking a unique path in this space by building its business around massive retail locations. These superstores are designed to draw customers in to browse, purchase, and eventually stay to consume a wide variety of cannabis products.
There are currently two superstore locations open to the public -- one just off the Las Vegas strip and one in Santa Ana, California. The business had a difficult go of it through the height of the pandemic lockdowns, which obviously limited foot traffic in their stores. But the company was able to pivot to home delivery and curbside pickup in order to help sales return to and surpass pre-pandemic levels. In Q3, the company reported year-over-year revenue growth of 44% and management stated it expects continued improvement as restrictions abate.
One growth lever that Planet 13 is waiting to pull is the ability to offer cannabis consumption at its superstore locations. In Nevada, a recent decision made this legal, and the company has already started building a consumption lounge at the Las Vegas location, ready to open as soon as they receive the license. The future of on-premises cannabis consumption in California is less clear, but the company has a blueprint in Nevada to follow if it's eventually allowed.
Planet 13 is also looking for a location for a superstore in Chicago after winning a lottery there for a dispensary license. In Florida, the company purchased a medical-marijuana license and is planning to open a network of neighborhood stores. Planet 13 is also a vertically integrated company, so it has its hands in all parts of the cannabis-production chain from growing to testing to distributing and selling.
With shares trading at four times forward sales, this is the cheapest Planet 13 has been since the summer of 2020. Even with the hurdles in the industry, the company is succeeding and in a strong position to be a major player in this space for a long time to come.
Image source: Getty Images.
2. An ancillary play on the cannabis space
In light of the risks inherent in the cannabis space, one smart move for investors is to look at companies that support the industry. To that end, Innovative Industrial Properties (IIPR -3.68%) is worth a look. IIP is a real estate investment trust (REIT) that's focused on buying properties it can lease to reputable cannabis businesses.
This business model has several advantages for investors. First of all, as a REIT, the company has to pay at least 90% of its taxable income to shareholders. At the time of this writing, IIP has a dividend yield of 2.7%, easily ahead of the S&P 500's average yield of 1.3%. Additionally, IIP enters into triple-net leases with the cannabis businesses, so the tenants are responsible for all costs related to the property.
One interesting twist on IIP's business is how it helps its tenants with financing. One of the challenges for cannabis companies is that marijuana remains federally illegal, making financing very tricky. As an additional source of income, IIP will loan capital to its tenants so they can improve and grow their businesses. This is a win-win for both parties, as the cannabis companies are able to more easily secure capital, and IIP gains another revenue stream.
IIP has produced impressive results. In Q3, revenue was up 57% year over year and net income per share rose from $0.86 to $1.20. Adjusted funds from operations increased from $1.23 to $1.70 over the same time frame. The balance sheet is also strong, with 20% debt-to-gross assets and approximately $2.2 billion in gross assets and no secured debt.
IIP plays an important role in the growth of this emerging industry. Shareholders can enjoy a strong dividend yield with high upside as cannabis legalization spreads to more states, and possibly even becomes federally legal.
