The US is still the land of milk and honey for cannabis, and there are other options and opportunities to play the market without investing in an MSO.
2019 was really a shocker for the cannabis industry. With the market declining over 50% over the year, many investors ran for the hills. And why not? There were enough reasons to.
One of the biggest issues facing the industry is that the black market is not shrinking as fast as people expected it would. In Canada, where the black market is still thriving, despite legalisation at the federal level, the answer was obvious. Until earlier this year, only flower and low-potency oil were available to be legally bought, while the illicit vape market is estimated to be over CAD$1 billion per year.
In the US, however, which allows for all form factors in recreationally legal states, the black market is also still thriving.
The reason in the US, however, is taxes. States that have legalised cannabis for adult-use, have also imposed large state taxes for that right. This has meant that the legal price of cannabis is much higher than can be bought in the black market, with the taxes being anything but cheap. As an example, in 2019 after only five years of recreational legalisation, the State of Colorado achieved the milestone of receiving over $1 billion in cannabis-derived taxes. While the tax revenue is certainly great for the government, it does very little in helping to eliminate the black market.
Now add to that, the vaping crisis. The crisis, which has been shown to be completely black-market related, had a compounding effect on investor sentiment. With the crisis spreading right across the US, the CDC recommended people immediately cease vaping, and this further decimated the legal market. Companies like KushCo Holdings (which supplies vape cartridges and other equipment to the industry) saw revenues decrease as a result of this crisis.
The US market
Yet even with the high state taxes, booming black markets and that little issue of cannabis still being classified as a Schedule 1 drug, the US remains the most profitable and lucrative cannabis opportunity in the world.
One of the most obvious ways to play the US market is via a Multi-State Operator (MSO). These cannabis companies set up shop in multiple states, and because cannabis cannot be transported across state lines (as it is still federally illegal), most of them have vertically-integrated operations in each of these states.
The issue with the MSO's, however, is twofold. Firstly, there are many of these companies, and choosing the right one can be difficult. And secondly, because they are so dependent on capital expenditure, having to set up cultivation, production and manufacturing in each State, raising cash is a constant issue for these companies, which is normally accompanied by falling share prices and shareholder dilution.
The US is still the land of milk and honey for cannabis, and there are other options and opportunities to play the market without investing in an MSO. Here are two companies we think could really take advantage of the fast-moving and developing US green rush.
Disclaimer: Past performance is not an indicator of future performance.
Innovative Industrial Properties (NYSE:IIPR) is a cannabis-centric Real Estate Investment Trust (REIT). The company purchases properties and converts them into cultivation and manufacturing facilities, before leasing it to cannabis companies looking to grow or process cannabis.
For cannabis companies – given the Federal illegality of cannabis – access to traditional banking and finance routes is not an option for them. Add to this the 280E tax rule that states that cannabis companies cannot write any business expenses off against tax, and having adequate cash flow is vital.
IIPR offers these cannabis companies the opportunity to either convert one of their assets into working capital through a sale and leaseback agreement or retrofits warehouses and other properties, offering cannabis companies a cash-flow positive, turnkey solution for growing cannabis.
Since its listing in 2018, the company has purchased 47 properties across 15 states. Although they develop cultivation facilities, they do not touch the plant and offer investors an opportunity to invest in cannabis, without having to concern themselves about legalisation.
Given its status as a REIT, it also means that the company must pay out all profits in the form of dividends, and have been paying up to $0.25 per quarter. A great income-earning company, that has also delivered accretive stock price appreciation (and continues to do so) for its shareholders. Innovative Industrial Properties is most definitely a pot stock capitalising on the booming US market.
Disclaimer: Past performance is not an indicator of future performance.
Planet 13 lays claim to the largest cannabis dispensary in the world. The Nevada-based "superstore" is 112,000 square feet in size, and in addition to a top-notch cannabis retail dispensary, it also boasts everything from a pizza shop to a cannabis testing lab. Simply put, Planet 13 has defined what the ultimate dispensary experience could be.
Nevada is one of the most lucrative markets in the US (behind California), with US-based market research firm – Arcview – suggesting that Nevada will deliver the highest per-capita cannabis spend by 2024. And having the largest and most visited store in Nevada, means Planet 13 are well-positioned to take advantage of this growth.
One of the most transparent cannabis companies in the US, Planet 13 puts out monthly traffic and retail numbers, giving potential investors the most up to date information to base their investment decisions on. And the numbers they have been reporting have been nothing short of impressive.
Between November 2018 and October 2019, the average number of daily visitors skyrocketed from 1,843 to 3,300, with paying customers increasing from 1,406 per day to over 1,900 per day. With the new restaurant complete, and the consumer-facing processing facility now open and live, these foot traffic numbers should continue to rise.
Rising foot traffic has also been accompanied by increased spend per customer. According to the monthly data, the average spend per customer was $80 in November 2018, with this number increasing month on month, moving past $100 per customer in 2019.
And in recent news, the company announced that a second superstore would be opening in Santa Ana, California in the latter half of 2020. The planned 40,000 square foot mega-dispensary will be positioned minutes from Disneyland.
This could be one of the best investing opportunities of 2020
Legislative changes are blowing through the US, and with it, an ever-increasing number of states legalising cannabis for recreational use.
With the success seen in Illinois, which legalised for adult-use on January 1 and saw products moving off the shelf at an unprecedented rate, this company is primed to take advantage of the booming US recreational market.
They have secured partnerships with the biggest cannabis companies in the US, and their portfolio is second to none.
And with the sector-wide pullback of 2019, this company is now at a bargain-basement price.
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