In case you missed it, last week was the earnings free-for-all in the cannabis industry that Wall Street and investors had patiently waited for. Unfortunately, things did not go as planned.
Although it was a well-known fact that Canadian pot stocks have been hit hard by supply issues, and U.S. cannabis stocks have struggled with high tax rates and a persistent black market, no one was prepared for just how poor marijuana earnings reports were in the most recent quarter. Each of the big four brutally underwhelmed Wall Street with their latest operating results, and investors once again took it upon themselves to pummel marijuana stocks even further. Since the end of the first quarter, the Horizons Marijuana Life Sciences ETF, the first cannabis-focused exchange-traded fund, has lost…
57% of its value.
And yet, three cannabis stocks managed to buck this trend and actually topped Wall Street’s earnings expectations in their most recent quarter.
Innovative Industrial Properties
Maybe it’s no surprise that Innovative Industrial Properties (NYSE:IIPR), one of the top-performing cannabis stocks this year and the only pure-play pot stock that pays a dividend, blew past Wall Street’s operating expectations in the third quarter. The $0.55 per share the company recorded in net income wound up being $0.08 per share ahead of the consensus estimate.
Innovative Industrial Properties’ not-so-secret to success is its setup as a cannabis-focused real estate investment trust (REIT). REITs receive preferential tax treatment in return for paying out most of their earnings as a dividend to shareholders. The company ended the latest quarter with 42 properties in its portfolio spanning 13 states. This means that as it adds more assets to its portfolio, its rental income and cash flow should rise accordingly.
Even more important, Innovative Industrial Properties is generating predictable cash flow from its assets. The weighted-average remaining lease on these 42 properties is 15.5 years, and the company is yielding 13.6%, on average, per lease agreement. This should result in a complete payback of its $431.2 million in invested capital in a little over five years.
Although investors in IIP will have to contend with the occasional share issuance to raise capital, the company appears well-positioned to succeed as the U.S. pot industry matures and expands.
Marijuana and hemp extraction-services company Valens GroWorks (OTC:VGWCF) also dazzled in its latest quarterly operating report, which was released five weeks ago. Valens wound up recording 16.5 million Canadian dollars in sales, an 87% improvement from the sequential second quarter, and net income of CA$0.05 per share. That’s a full CA$0.03 per share more than Wall Street had been counting on.
What’s made Valens GroWorks’ ascent so impressive is that it only recently began operations as an extraction company. This rapid rise in sales from virtually nothing demonstrates just how important these marijuana and hemp middlemen like Valens will be in providing resins, distillates, concentrates, targeted cannabinoids, and white-label manufacturing and packaging services. After all, derivative pot products are set to launch in Canada next month, and they sport significantly juicier margins than dried cannabis flower. This makes extracts a must for any pot stock.
Valens has also had little trouble securing deals for its services. It’s already signed a two-year agreement with HEXO to provide extraction services for 80,000 total kilos of cannabis and hemp biomass, and will be doing the same for Tilray at a rate of 60,000 kilos a year. These fee-based contracts, similar to IIP above with its rental agreements, provide predictable revenue and cash flow on a quarterly basis.
With Valens angling to boost its processing capacity to 1 million kilos a year, look for the company’s sales and profits to soar in the quarters to come…
Continue reading at THE MOTLEY FOOL