It’s a scary time to be an investor. Due to fears surrounding the COVID-19 pandemic, the stock market has been hammered over the past few weeks. On March 11, the Dow Jones slid by 5.9% and closed more than 20% down from its most recent all-time high, thus officially entering bear market territory.
With that said, the worst thing investors can do is panic. There are still scores of excellent stocks to consider buying, and now may be an especially opportune time, since many of these stocks are cheaper than they were at the beginning of the year. Here are two cannabis stocks investors should buy right now and hold through the bear market: Charlotte’s Web (OTC:CWBHF) and Innovative Industrial Properties (NYSE:IIPR).
1. Charlotte’s Web
Charlotte’s Web is the leader in the U.S. market for cannabidiol (CBD) products. And while this market presents some opportunities, it also comes with its share of challenges. Most notably, the U.S. Food and Drug Administration (FDA) recently warned consumers about the dangers of CBD-based products. According to the health industry regulator, CBD can cause side effects including liver injury. The FDA also said there hasn’t been enough research done about CBD, and the claims regarding its alleged therapeutic benefits remain unproven.
Despite this challenge — and others — I believe Charlotte’s Web is worth buying; let’s consider three reasons why. First, the company has a strong retail presence in the U.S., with its products in about 11,000 retail locations around the country. It is worth noting that the company recently made an acquisition that will further expand its retail presence. On March 23, Charlotte’s Web announced it was acquiring Abacus Health Products in an all-stock transaction valued at approximately 99 million Canadian dollars.
Per the agreement between the two companies, each of Abacus’s shareholders will receive 0.85 share of Charlotte’s Web for each share of Abacus owned. The transaction is expected to close in the second quarter. Abacus Health offers a suite of over-the-counter hemp products (hemp is derived from CBD) and has a strong retail presence in the U.S. Also, Abacus Health boasts a network of about 16,500 healthcare practitioners. Thanks to this acquisition, Charlotte’s Web’s presence will expand to “15,000 unique doors.”
Second, Charlotte’s Web is currently in the process of significantly ramping up its production capacity. The company is building a 137,000 square foot production facility in Colorado that will multiply its output capacity by a factor of 10. The facility should be up and running by the end of the year. Lastly, Charlotte’s Web is attractively valued, at least when compared to many of its peers in the cannabis industry. Since Charlotte’s Web isn’t yet consistently profitable, let’s compare the company’s price to sales ratio with that of Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB).
ACB PS Ratio (Forward) data by YCharts
Charlotte’s Web’s comparatively attractive valuation — coupled with its strong retail presence and leading position in the U.S. CBD market — makes the company one of the best investment options in the cannabis industry.
2. Innovative Industrial Properties
Innovative Industrial Properties is a real estate investment trust (REIT) that focuses on leasing spaces to companies within the medical cannabis market. Let’s consider two reasons why this company is worth investing in. First, Innovative Industrial Properties currently owns 51 properties in 15 states with an average lease length of 15.6 years.
There are many more states in which medical uses of cannabis are approved (there are more than 30 states that have legalized medical uses of marijuana); given that Innovative Industrial Properties is the leading REIT that focuses on leasing properties to state-licensed medical cannabis companies, the company will likely continue its expansion to more states.
Image Source: Getty Images
Second, few marijuana companies have been able to post consistent profits, and others have recorded profits thanks to one-time adjustments or other things that had nothing to do with their core operations. For instance, during the fourth quarter of its fiscal year 2020, Aurora Cannabis recorded a net income of CA$10.4 million, but this included unrealized gains on derivative liability of CA$143.8 million.
By contrast, Innovative Industrial Properties has consistently recorded profits. During the fourth quarter of 2019, the company’s net income was $9.6 million, up from $2.3 million compared to the year-ago period. For the full year, Innovative Industrial Properties recorded a net income of $22.1 million, up by 292.7% compared to the fiscal year 2018. Innovative Industrial Properties’ ability to post recurring profits is a major selling point given that few of its competitors are doing the same.
Innovative Industrial Properties is performing significantly better than the broader market so far this year. Year to date, the company’s shares are up by 11.7%, while the S&P 500 is down by 18.6%. In my view, Innovative Industrial Properties will continue to outperform the market and most other cannabis companies, making it a good cannabis stock to buy right now.
