Top 3 Ancillary Cannabis Stocks for 2020

Investing in the Ancillary Market is a great way to get in on the cannabis game, while also side-stepping the red tape that plagues traditional "plant-touching" companies. We've put together a list of our top 3 ancillary stocks for 2020.

As we move into 2020, more and more people are looking for new ways to invest in the cannabis market.

Although, this should come as no surprise when you consider that sales of legal cannabis in 2018 reached nearly $10.9 billion in the US alone. In fact, Grand View Research has predicted that the global cannabis market will increase to $66.3 billion in value by 2025, growing at a CAGR of 23.9%. 

But, if you're new to the pot stock game then it can be easy to get confused by the dizzying array of different investment options. There's cannabis cultivators, producers, retailers, pharmaceutical manufacturers and hemp growers, just to name a few. 

However, some sections of the market have proved stronger than others during 2019, while certain pot stocks have significantly underperformed. Additionally, many of the biggest players who handle marijuana directly—such as growers and retailers—have struggled over the last year due to ongoing supply issues in Canada, the recent arrival of the "Vape Crisis", and the still-thriving black market in the US.

Luckily, there are still a number of ways to play the cannabis market without having directly interact with the plant itself, such as the Ancillary Cannabis Industry. Ancillary companies are often referred to as the "picks and shovels" of the cannabis industry, as they offer crucial services to major marijuana producers, such as soil yield optimisation, packaging and branding solutions, and real estate investment.

Ancillary pot stocks offer a safer way of getting in on the green rush—as they are often insulated from fluctuations in the cannabis market—for risk-averse investors who want to avoid the volatility associated with pharmaceutical developers or Multi-State Operators (MSO).  

And to make things simple for you, we've selected our top 3 ancillary stocks for 2020, starting with KushCo Holdings.

Disclaimer: Past performance is not an indicator of future performance.

1.  KushCo Holdings (OTC:KSHB)

If you want to start investing in the Ancillary Market then one of the easiest ways to get started is with a packaging and branding company, such as KushCo Holdings (OTC:KSHB).

Companies like this are an excellent way to start building your investment portfolio, as they work with growers to help them meet the complicated regulations and laws regarding packaging compliance. They also assist cultivators with marketing duties, as well as the design and production of branded products.

Our customer base is gaining strength with the largest multi-state operators and Canadian LP's starting to scale in existing markets, while also preparing for growth in new emerging geographies – including recently approved Illinois. KushCo Holdings Chairman and CEO, Nick Kovacevich

This is great news for risk-averse investors, as there will always be a demand for effective, reliable third-party packaging solutions, especially when you consider that most cultivators lack the resources needed to bring their products to market independently.

And this is no small market, with research from Cowen suggesting that the US cannabis industry could balloon to over $80 billion in value by 2030.

The research team behind the study also predicted that packaging and supplies could account for almost 6% of the market by this time, which means that KushCo could be looking at a potential addressable market of more than $4.8 billion within the next 10 years.

KushCo currently stocks more than 1,500 SKU's, with products that cover a multitude of different form factors including flower, pre-rolls and concentrates. The company has also been performing impressively in 2019, reporting a year-over-year net revenue increase of 221% to $41.5 million, while its gross profits climbed to 17.8%.

Additionally, KushCo closed on a $50 million credit facility with Monroe Capital LLC during 2019, which consists of a $35 million revolving line of credit and an accordion of up to $15 million—subject to compliance and borrowing base availability—leaving them well funded to continue pursuing their current expansion initiatives.

The Chairman and CEO of KushCo Holdings, Nick Kovacevich, recently stated the company remains "committed to investing in the expansion of the business through initiatives targeting high-demand, high-margin opportunities that will facilitate increased cross-selling throughout our robust customer base."

"Partnerships will help us achieve those revenue and margin goals, including our recently announced deal with CA Fortune, which opens an entirely new vertical that will facilitate access to a distribution network unlike anything ever experienced by the cannabis and hemp industries before.

"We expect demand to increase for the company's core product offerings as the cannabis and hemp markets continue to expand and mature," Kovacevich said.

The company had a successful quarter during Q4 2019—with a net revenue increase of 135% year-over-year to $47.0 million—putting it in prime position to take advantage of the growing US cannabis market during 2020.

Disclaimer: Past performance is not an indicator of future performance.

2. GrowGeneration Corp (OTC:GRWG)

Another popular way to get in on the Ancillary Market is to invest in a hydroponic growing technology developer, such as GrowGeneration Corp (OTC:GRWG).

The company is already an industry leader in the agri-tech space, having rapidly grown into the largest hydroponic supplier in the US since its founding in 2014. GrowGen currently has 23 organic centres across 9 states, allowing it to supply the cannabis industry with crucial lighting technology, pest controls, ventilation, soils and propagation supplies.

The company managed to pick up $29.0 million in revenue during 2018—an increase of 102% when compared to the previous year—and had already generated $13.1 million by the conclusion of Q1 2019, with an adjusted EBITDA of $615,509.

This was our 5th consecutive year of record growth for GrowGeneration, with revenues growing over 100% year over year. With our corporate foundation now in place, the company is well positioned to continue 100% year over year growth for several more years. GrowGen is now in 8 states, 21 locations, and services some of the country's largest commercial multi-state cultivation operators. GrowGeneration Co-Founder and CEO, Darren Lampert

In July 2019 the company announced that it had completed an upsized, private placement totalling $12.8 million, before setting its next milestone as $100 Million in annual revenue.

According to the Co-Founder and Chief Executive Officer of GrowGeneration Corp, Darren Lampert, "the company now has over $16 million of cash on the balance sheet to execute on multiple acquisitions, with several planned to close in the 3rd and 4th quarters of 2019."

"These acquisitions, when completed, are expected to propel our Company to over $100 million in annual sales."

"We are also pleased that our existing institutional investors, Gotham Green Partners, Merida Capital Partners and Navy Capital, are reinforcing their confidence in the Company with additional capital commitments."

"Lastly, we welcome JW and Jason Wild to our team of institutional strategic investors," Lampert said.

The company's strategic institutional investors participated in the offering, which featured a $4.0 million investment from lead investor Gotham Green Partners, $2.0 million from Merida Capital Partners and $1.3 million from Navy Capital.

During 2019 store operating costs and corporate overhead spending—defined as a percentage of revenue—also decreased substantially, declining to 15% and 10.5%, respectively.

The company is currently experiencing its 5th consecutive year of revenue growth and can expect to see continued expansion of its market leading position in the coming year.

Disclaimer: Past performance is not an indicator of future performance.

3. Innovative Industrial Properties (NYSE:IIPR)

If you want to avoid the market fluctuations that can effect traditional pot stocks, then a cannabis real estate investment company, like Innovative Industrial Properties (NYSE:IIPR), might be your best option.

Innovative Industrial Properties has a similar business model to other real estate investment trusts. The company operates by acquiring land and other assets, which are then leased out to cannabis companies for an extended period.

As a result, the company enjoys highly predictable cash flows, with the typical length of one of its leases being approximately 15.5 years. 

It is heartening to see the many significant steps that Illinois officials have taken to open the medical cannabis market for patients in need, and we are excited to support AWH in the enhancement of this facility to meet that demand. President and CEO of Innovative Industrial Properties, Paul Smithers

IIPR completed an underwritten public offering of 1,495,000 shares of common stock earlier this year, resulting in gross proceeds of approximately $188.4 million. This means the company is now well-funded to continue pursuing expansion initiatives during 2020.

The company's most recent investor update indicated that its investments are currently generating an average yield of 14.5%, which should allow IIPR to fully pay off its initial investments within a five-year period.

IIPR has also secured a partnership with Ascend Wellness Holdings (AWH), which saw the company offer $8 million in funding to AWH to support the continued expansion of its regulated cannabis cultivation and processing facilities.

The President and CEO of Innovative Industrial Properties, Paul Smithers, said that the company is "excited to team up with AWH again as their long-term real estate partner in Michigan".

"AWH is very well-positioned, with a strong management team and balance sheet, as it ramps up its operations in Massachusetts, Illinois, Michigan and Ohio, each of which presents a tremendous market opportunity."

"We look forward to supporting their continued growth and success for many years to come," Smithers said.

The company generated rental revenue of approximately $8.3 million during Q2 2019, representing a 155% increase on the same period during 2018. IIPR has also been expanding rapidly, more than doubling the number of properties in its portfolio from 11 to 27.

With an impressive portfolio of assets and a rock-solid business model, investors can expect further growth from IIPR in 2020.

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Hugo Gray
Hugo Gray

Hugo Gray is a Melbourne-based journalist with a body of work that covers a diverse range of topics, including immigration law, sex technology, and now the rapidly expanding cannabis industry.

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