Even the Safest Pot Stocks Are Now in Trouble

For the better part of the year now, marijuana stocks have been taken to the woodshed. Following a first quarter that saw more than a dozen cannabis stocks rise by at least 70%, nearly every pot stock has since lost 30%, 50%, or maybe even more of its value…

The marijuana bubble is bursting

The problems and growing pains for the North American weed industry are abundant. In Canada, regulatory agency Health Canada has been slow to review and approval cultivation, processing, and sales license applications. In some instances, this has led to wait times of more than a year before growers can plant their crops and bring product to market.

Certain Canadian provinces have also been slow to green-light the licensing of physical dispensaries. Ontario, a province with approximately 14.5 million residents, has just two dozen open dispensaries. With so few locations in which to purchase legal marijuana, it should come as little surprise that the black market is thriving. In fact, this lack of retail channels has created an odd scenario whereby Canadian growers are dealing with oversupply despite very little legal-channel demand actually being met.

Then there’s the United States, which has struggled with a tax problem in a number of states. California, the poster child of high tax rates, has been hitting cannabis consumers with a state and local tax, an excise tax of 15%, and a wholesale tax that varies depending on whether it’s in dried cannabis flower or leaf form. In total, the typical marijuana consumer in California is on the line for around a 45% tax rate, which makes it virtually impossible for legal-channel providers to compete with the illicit market.

The Swiss cheese-like legalization process in certain states is also partially to blame. Municipalities in recreationally legalized states like California and Michigan have the right to ban adult-use dispensaries, which can further encourage consumers to turn to the black market.

Suffice to say that the going hasn’t been easy for pot stocks.

A few cannabis safe havens have been bright spots in an otherwise decimated industry

Perhaps the only bit of good news for investors is that there have been a couple of niche bright spots within the marijuana industry.

For example, cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR) has been a clear outperformer in 2019, with a year-to-date gain of 74% through Nov. 20. That’s well over a 100-percentage-point outperformance when compared to the dismal year-to-date returns of brand-name pot stocks like Aurora Cannabis.

The beauty of Innovative Industrial Properties is the company’s highly predictable business model. As a REIT, it’s tasked with acquiring land and facilities that can be used to grow or process medical marijuana in the United States. It then leases out these assets for extended periods of time and simply sits back while reaping the rewards of rental income. Innovative Industrial Properties has an easy-to-understand and transparent business model with a weighted-average remaining lease length on its 42 properties of 15.5 years, and an average current yield on invested capital of 13.6%. Translation: IIP is going to get a complete payback on its $431 million in invested capital in just over five years, with everything after that being gravy.

This predictability of cash flow was also apparent with extraction-service providers, such as Neptune Wellness Solutions (NASDAQ:NEPT)Valens GroWorks (OTC:VGWCF), and MediPharm Labs (OTC:MEDIF), all of which have done well for shareholders in 2019…

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