Last week, the stock market turned in its worst performance in more than 11 years. When the curtain closed, the 123-year-old Dow Jones Industrial Average, technology-laden Nasdaq Composite, and benchmark S&P 500, declined by 12.4%, 10.5%, and 11.5%, respectively. It also represented the quickest descent into correction territory for the major indexes in history.
At the heart of these declines is growing concern surrounding the spread of coronavirus disease 2019 (known officially as COVID-19), the lung-focused illness that’s killed almost 3,000 people and sickened over 87,000 globally, as of March 1. Should COVID-19’s spread continue globally, there’s the real possibility of supply chain disruption and a U.S. or global recession.
Generally speaking, most industries don’t fare well when a recession strikes. That’s because businesses and consumers tend to pare back their discretionary spending. However, there are a few companies within one of the fastest growing industries on the planet — marijuana — that should fare just fine if a North American or global recession ensues. If things continue to grow bleaker, economically, look for these five marijuana stocks to make money.
Innovative Industrial Properties
The closes thing to a surefire profit in the cannabis industry is real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR). That’s because REITs have very low operating expenses and highly predictable cash flow. As a cannabis REIT, Innovative Industrial acquires medical marijuana cultivation farms and processing sites, then leases these assets for 10 to 20 years.
One major factor that continues to work in IIP’s favor is the fact that most U.S. multistate operators (MSO) are struggling to gain access to traditional form of financing, such as loans and lines of credit. Thus, in order to raise capital, many have been negotiating sale-leaseback agreements with Innovative Industrial, whereby IIP provides upfront cash to acquire a property, then leases the property back to the seller. As long as cannabis banking reform remains a no-go at the federal level, IIP is going to hold a clear advantage in providing financing to MSOs.
Currently holding 51 properties in its portfolio across 15 states, the company is yielding an average of 13.3% on its capital investments. This means it’ll take a mere 5.4 years for IIP to receive a complete payback on its investments.
The only Canadian licensed producer that looks to have a really good shot at making money if a North American or global recession were to occur is New Brunswick-based OrganiGram Holdings (NASDAQ:OGI).
One of the biggest keys to OrganiGram’s success is that it’s only operating one licensed facility (in Moncton, New Brunswick). Having only one campus makes it easier for OrganiGram to adjust production and expenses to meet market demand, at least relative to other major growers that have numerous cultivation farms and processing sites.
OrganiGram is also slated to be one of the most efficient growers in North America. Assuming the company eventually completes Phase 4C of its Montcon build-out, it’ll be producing 113,000 kilos of cannabis per year in less than 500,000 square feet of growing space. This roughly 230 grams of yield per square foot is likely twice as high (if not more) than the yield per square foot of its top competitors.
The point is, with expansion-related costs now mostly in the rearview mirror and high-margin derivatives beginning to hit dispensary shelves, OrganiGram should be profitable on a recurring basis very soon, recession or not.
Extraction-services provider Valens (OTC:VLNCF) is another company with a very good chance of generating recurring profits, even if a recession were to strike.
Based in Canada, Valens sits at the center of one of the fastest-growing trends within the marijuana industry: derivatives. Derivatives being alternative consumption options, such as edibles, infused beverages, vapes, topicals, and concentrates. Derivatives offer considerably juicier margins than traditional dried flower, making them a must-have for every grower’s product portfolio. And derivatives can’t be made without first processing hemp or cannabis biomass, which is what Valens does for a living.
Last week, Valens wound up reporting its fourth-quarter and full-year operating results. Despite only commencing processing operations a little more than a year ago, Valens’ revenue grew by 86% from the sequential third quarter to $30.6 million, with adjusted EBITDA of $17.7 million. Though the company officially lost money on a full-year basis, Valens earned $8.3 million on an operating basis. Given that derivatives are finally coming into their own in Canada, this operating income should expand further in 2020 and beyond.
Unlike Valens, which is angling for 1 million kilos of peak run-rate processing capacity per year, MediPharm Labs is targeting closer to 500,000 kilos of annual run-rate processing capacity. While more processing capacity would seem better on paper, having less processing capacity should allow MediPharm to be nimbler when it comes to its expenditures and maximizing the use of its processing machinery.
This is also a company that managed to become profitable by the quarter beginning in April 2019, despite commencing its processing operations less than five months earlier. With the high costs of expansion now mostly in the rearview mirror, and MediPharm Labs basking in the relative cash-flow predictability of processing contracts that can last for 12 to 24 months, this company looks like a shoo-in to be profitable on a regular basis.
Among U.S. MSOs, the only one with a clear path toward continued profitability during a recession is Trulieve Cannabis (OTC:TCNNF).
Unlike most MSOs that spread themselves thin and aimed to build a retail, processing, or cultivation presence in as many legalized U.S. states as possible, Trulieve has been laser-focused on the Florida market. Of the company’s 47 operational dispensaries, 45 of them are located in the Sunshine State. By targeting the medical marijuana-legal Florida market so aggressively, Trulieve Cannabis has been able to secure the lion’s share of the Sunshine State’s cannabis market.
What’s more, by focusing on a single state, Trulieve has been able to effectively build up awareness of its brand with Floridians, thereby keeping its marketing costs down. Through the first nine months of 2019, Trulieve’s operating expense only totaled $50.6 million. Over this same period, the company generated $173.1 million in sales and a gross profit of $111.5 million, before fair-value adjustments.
As long as Trulieve Cannabis can maintain its mammoth lead in market share in Florida, there’s no reason it can’t remain very profitable in virtually any economic environment.