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Imagine a boxing ring in which marijuana stocks are fighting each other.
In one corner, a marijuana producer claims a market capitalization of $ 6.6 billion, the industry's largest production capacity, and rumors that it is being courted by the world's most famous beverage company. In the other corner is a little-known real estate investment trust focused on the cannabis industry with a market capitalization of less than $ 300 million.
The former competitor is Aurora Cannabis (NYSE: ACB), abd this last is Innovative industrial properties (NYSE: IIPR). Which of these two marijuana stocks is most likely to win the match by offering the best long-term returns for investors?
Source of the image: Getty Images.
The Aurora Cannabis Case
Just as advertisers at boxing matches emphasize the weight and size of fighters, we must pay special attention to the size of Aurora Cannabis. Thanks to a vertiginous number of acquisitions in recent years, Aurora should soon have the largest production capacity of all marijuana growers on the planet.
This capacity is important because more product should result in faster revenue growth. Aurora currently sells all the cannabis he can ship. Capacity has also played a key role in Canada's supply agreements with the marijuana market for recreational purposes.
To succeed in the cannabis industry, it takes more than capacity, of course. The leisure market is very different from the medical cannabis market. Retail expertise is needed to effectively target customers. Aurora's partnership with the leading liquor retailer alcanna is a big plus on this front. Both companies open retail cannabis stores in Alberta and other provinces. Aurora has also made a significant investment in Alcanna.
Canada's regulations on cannabis-based edible products, including beverages, are not yet finalized. But Aurora definitely plans to enter the potentially lucrative market as soon as possible. She could very well find a partner outside the cannabis industry before the hour.
The global market for medical marijuana represents an even greater opportunity for Aurora Cannabis in the long term. Aurora executives often refer to forecasts by investment firm Eight Capital that the global marijuana market could reach $ 180 billion in the future. The company is already present in at least 14 countries outside Canada. The most important of these is Germany, which legalized medical cannabis last year and boasts the largest marijuana market, excluding America. North.
In summary, the investment in Aurora Cannabis comes down to two assumptions. First, the cannabis industry will grow almost exponentially in the next decade. Second, the scale of Aurora's operations makes it one of the most likely winners.
The case of innovative industrial properties
What about Innovative Industrial Properties (IIP)? It presents one of the most interesting ways to invest in the cannabis industry.
IIP is the largest US firm specializing in the cannabis industry for medical purposes. The company develops properties and then rents them to tenants who operate medical cannabis businesses. IPI's actions may be of interest to investors for several reasons.
The biggest draw for IIP is that it targets the US market. Marijuana sales in the United States are expected to exceed $ 22 billion by 2022. The United States remains by far the largest marijuana market in the world, and IIP currently owns and leases nine properties in seven states.
There are many opportunities for growth for the IIP. Thirty US states have legalized marijuana for medical purposes and others are potentially on the way. In addition, small marijuana growers may have difficulty raising the funds needed to start their business, and the IIP program offers them an excellent alternative to access capital.
IIP seems to be in great financial shape. The company has a solid balance sheet without debt. All of its properties are leased, with a weighted average lease term of 15 years and an average return on invested capital of 15.7%.
In addition, IIP offers investors something that few marijuana shares have to offer: a dividend. As a REIT, the corporation must return to shareholders at least 90% of the pre-tax earnings in the form of dividends. The dividend of IPI is currently 3.4%.
Best marijuana stock
The market capitalization of Aurora Cannabis can only be defended if the global market for marijuana increases dramatically and quickly. But as long as the company can not operate in the United States, it's like a boxer who fights with one hand tied behind his back – and one leg also tied up. IIP does not have this limitation.
IIP stocks are trading at nearly 21x expected earnings. This is high compared to many shares, but next to Aurora, it is very cheap. This is all the more true as Aurora has not yet generated sustained earnings.
Aurora has strong long-term potential, but the same goes for IIP. Unlike Aurora, however, IIP does not have to wait years for its valuation to be relatively attractive depending on its growth prospects.
The IIP carries risks associated with the continuation of the federal ban on marijuana in the United States. However, I think these risks are decreasing. My point is that this match goes to Innovative Industrial Properties. At least for now, it's the best marijuana stock.
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