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Buy Low, Sell High: 2 Favorite Pot Stocks

MyWallSt Staff, The Motley Fool

There are numerous ways to measure product uptake. Tens of thousands of books are sitting on business school library shelves across the world with documented techniques on how to assess the distance a product has traveled into its life journey. Sometimes, however, it's just obvious that something big has started and is on the precipice of being far bigger — no books required.

Cannabis is one such industry, with all the signs indicating that weed may play out to be one of the biggest investible megatrends of our lifetime.

Marijuana leaves growing

Image Credit: Matthew Brodeur on Unsplash

In October 2018, Canada fully legalized the adult use of recreational cannabis, the first major western country to do so on a national scale. This is why many of the pure-play cannabis stocks we see today are only listed in Canada.

Closer to home, marijuana remains illegal at the federal level in the U.S. but is legal for recreational use across 10 states (plus the District of Columbia) and medical use in 33. Products derived from industrial hemp are allowed under the Farm Bill, though the US CBD supplements market is highly fragmented, with only two brands capturing more than 2% of the market.

All in all, it's still very early days for investing in weed and therefore you need to be aware that doing so carries a higher risk-reward profile than with industries that don't have to navigate changing laws per country and jurisdiction. But, with all this considered, there are two weed stocks out there that we really like and think could happily live in a healthily diversified portfolio.

For now, you'll find neither of these in our MyWallSt app because of their extremely high-risk profile, though they might make an appearance in the not too distant future.

MedMen Enterprises

Commonly referred to as the Apple of cannabis, MedMen Enterprises (CNSX: MMEN) is a U.S.-based cannabis company that's listed on the Canadian Securities Exchange (CSE). And since we're making comparisons with Apple, MedMen's Californian stores actually had a higher 'sale per square foot' ratio than Apple stores in their 4th quarter last year — averaging $6,257 per sq.ft.

They have more than 1,000 employees, operates 35 operational stores (with plans to hit 50 by the end of the year), and are focused on the self-proclaimed 'five key states' of Arizona, California, Florida, Nevada, and New York.

There's a lot to like about this company, but what has caught our eye most was MedMen's acquisition of the privately held company PharmaCann in a $682 million all-stock deal. This is one of the largest deals in the cannabis industry and instantly boosts some key metrics for MedMen, with the number of state licenses growing to 12 and retail licenses jumping to 84 locations.

This isn't the only recent acquisition made by the company, however, with the purchase of two vertically integrated cannabis operations in Arizona for $33.5 million which closes this year too, as well as the licensed Illinois dispensary 'Seven Point' for an undisclosed sum.

Long story short, if buying a premium brand in land-grab mode is of interest to you, then MedMen is the top dog. Make sure to check out their website too, which will really give you a feel for the business.

Innovative Industrial Properties

Founded in December 2016, Innovative Industrial Properties (NYSE: IIPR) is a REIT (real estate investment trust) that focuses on properties for cannabis-company tenants.

This is the only company exclusively focused on medical-use cannabis facilities for acquisition. Tenants are licensed growers under long-term, triple-net leases. A triple-net lease is a form of real-estate lease agreement where the tenant is responsible for the ongoing expenses of the property, including real estate taxes, building insurance, and maintenance — as well as paying their rent.

As of this month, IIP owns 22 properties (approximately 1.6 million rentable square feet) across 11 states that are 100% leased to state-licensed medical-use cannabis operators. In fact, PharmaCann is their largest tenant by the total amount invested and accounted for 31% of IIP's rental revenues in the last quarter.

There are some extra benefits of investing in a REIT too, regardless of the industry. A REIT is a corporation that combines the capital of many investors to acquire income-producing real estate. In particular, REITs get a special dispensation on federal income tax as long as they pay a high percentage out to their shareholders as dividends. IIP's has been increasing its dividends yearly since 2017 and has a forward dividend yield of 2.11%.

IIP was added to the S&P SmallCap 600 index (INDEXSP: SP600) this year and I believe this industry is poised for significant growth in coming years. Oh, and while visiting their website is also a good idea, don't expect the Apple-esque experience of MedMen.

This article was first published by MyWallSt. Check out our handpicked list of market-beating stocks in MyWallSt app, available to download on iOS and Android now!

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The Motley Fool recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy .