During the last decade, the legal cannabis industry has made incredible advancements as countries across the globe have legalized or decriminalized the plant. In the US, several of the largest states have legalized cannabis while it remains illegal at the federal level and this has made the investing process more complex.
The reason why the cannabis investing process is complex is because major financial institutions and broker-dealers in the US cannot provide any information to clients on the sector. Since cannabis is considered to be illegal at the federal level, Wall Street financial firms are not allowed to cover US cannabis companies, and this has made it more difficult for the market to be aware of the legitimate opportunities in the sector.
In 2014, we started to cover the cannabis sector and have watched how the industry has advanced in such a short period of time. Back when we started to cover the sector, there were only a few companies that we would consider to be legitimate. Over the last few years, we have put a major emphasis on legitimate companies and want to highlight 3 companies that we were ahead of the street on.
GW Pharmaceuticals: An Execution Story to be Aware of
GW Pharmaceuticals plc (GWPH) is the first company that we want to highlight and is an opportunity that we continue to be excited about. The company has a deep pipeline of pharmaceutical products that are in advanced stages of Food and Drug Administration (FDA) clinical trials.
From 2014 to early 2016, we considered GW to be one of the most underappreciated opportunities on the Nasdaq and highlighted the business on a number of occasions. In March of 2016, GW skyrocketed after it issued positive data for a Phase 3 clinical trial on Dravet’s Syndrome. Following the positive report, GW jumped almost 100% and we were glad to be ahead of the market on the opportunity.
When compared to its peers, GW has the most coverage from Wall Street broker-dealers and we are favorable on this. Currently, the company is trading below its average price target and we will be keeping an eye on how the management team is able to bring additional cannabis derived treatments to market.
Scotts Miracle-Gro: Not Your Father’s Cannabis Company
Last week, Scotts Miracle-Gro (SMG) released third quarter financial results that came in well above Wall Street estimates the business reported continued strength from both its US Consumer and Hawthorne segments.
In 2015 and 2016, we frequently highlighted Scotts as one of the best positioned ancillary cannabis companies and has been nothing short of an execution story. The shares are up more than 200% from when we initially highlighted the opportunity and believe that it is an opportunity to be aware of.
Following the earnings report, a few Wall Street broker-dealers raised their price target on Scotts Miracle-Gro and we found this to be significant. SunTrust Robinson raised its price target to $180 from $155. JP Morgan raised its price target to $160 from $136 and we are favorable on the upside that is implied by SunTrust’s updated price target.
In the earnings report, Scotts provided better than expected sales guidance for future quarters and has benefited from the COVID pandemic. Going forward, the company has visible growth prospects and is an opportunity that has significant potential catalysts for growth. Despite the recent rally, we remain bullish on the long-term opportunity that is associated with the operation and will be sure to provide updates as needed.
Innovative Industrial Properties: A Leading Cannabis REIT
Another company that we were ahead of the curve with was Innovative Industrial Properties, Inc. (IIPR). We started to cover the New York Stock Exchange (NYSE) traded cannabis REIT once it completed its initial public offering (IPO) in late 2016.
When Innovative Industrial Properties commenced trading on the NYSE, it owned a handful of cultivation and processing facilities in a few US markets. Over the last year, the cannabis REIT has been nothing short of an execution story and has been raising capital and purchasing properties at a rapid pace.
As of July 20th, Innovative Industrial Properties owned 61 properties located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, Nevada, North Dakota, Ohio, Pennsylvania and Virginia. In aggregate, the properties have approx. 4.5 million rentable square feet in aggregate (which were 99.2% leased).
As of this date, the cannabis REIT had invested approx. $820.4 million and had committed an additional approx. $213.3 million to reimburse certain tenants and sellers for completion of construction and tenant improvements at the properties. We are favorable on how the management team has been executing on a US growth strategy and will be closely following the opportunity on a going forward basis.