3 Great Marijuana Stocks You Might Be Overlooking

Some marijuana stocks receive a lot of attention from investors. They tend to be the stocks of companies focusing on the Canadian marijuana market with ginormous market caps relative to their sales.

But there are some smaller stocks of companies that focus primarily on the U.S. market that also merit investors’ attention. Three great marijuana stocks that you might be overlooking are Innovative Industrial Properties (NYSE:IIPR)KushCo Holdings (NASDAQOTH:KSHB), and Origin House (NASDAQOTH:ORHOF). Here’s what makes these stocks stand out.

Three marijuana leaves.

IMAGE SOURCE: GETTY IMAGES.

1. Innovative Industrial Properties

Innovative Industrial Properties (IIP) has an interesting twist: The company is a real estate investment trust (REIT). When you think of REITs, images of healthcare facilities, shopping malls, and storage facilities might come to mind. But IIP focuses on medical cannabis facilities.

Business is booming. IIP reported year-over-year revenue growth of 110% in the fourth quarter. And unlike many companies in the cannabis business, IIP is consistently profitable. It even pays a dividend with a healthy 2% yield.

The company currently owns 13 properties in the U.S. All of those properties are leased to operators with medical cannabis licenses in their respective states. IIP makes an average yield on invested capital of a little over 15% from its rent and property management fees for the properties.

IIP has a business model that is essentially a “rinse and repeat” approach. The company invests the money it makes from current properties into buying more properties and leasing them out. Just in the past two months, IIP has acquired properties in California and in Ohio that it immediately leased to cannabis operators. The company should be able to continue growing well into the future with 33 U.S. states now allowing the legal use of medical cannabis.

2. KushCo Holdings

KushCo Holdings is another marijuana stock that doesn’t grow marijuana. Instead, KushCo provides a range of products and services that are used by cannabis businesses, most of which are based in the U.S.

The company is best known for its packaging solutions for the cannabis industry, such as pop-top bottles, barrier bags, and child-resistant containers. Actually, its name was originally KushCo Bottles, which reflected its initial focus. Now, though, KushCo’s businesses extend beyond packaging into hydrocarbons and solvents used in extracting cannabinoids, plus branding, marketing, and e-commerce solutions.

KushCo posted strong year-over-year revenue growth of 186% in its last quarter. However, the company isn’t yet profitable. Its profit margins even slipped in the recent quarter in part because problems with suppliers caused its costs associated with overnight shipping to jump. However, these should be only temporary issues.

There are multiple paths for KushCo to grow. Most of the markets in states that have already legalized marijuana are still in their early stages. As these markets mature, KushCo should benefit. The company could also profit from the legalization of hemp in the U.S.

3. Origin House

Origin House also provides a unique angle on investing in the growth of the marijuana industry. The company previously focused on royalty streaming deals where it would give cannabis operators capital in exchange for a percentage of future revenue or an equity stake. Now, though, Origin House has a much different business model.

The company ranks as the largest distributor of legal cannabis products in California. Origin House has steadily expanded its own lineup of cannabis brands as well and continues to add even more brands. And its Trichome Financial subsidiary is still in the business of providing capital to up-and-coming cannabis companies.

Origin House’s most recent financial results announcement was for the quarter ending Sept. 30, 2018. The company’s sales skyrocketed by 790% year over year in the quarter thanks in large part to key acquisitions. Origin House isn’t consistently profitable yet, however.

The company should be poised for significant growth as the recreational marijuana market in California picks up momentum. Origin House could also increase revenue in Canada through its acquisition of vape retailer 180 Smoke.

A few downsides

I don’t want to paint too rosy of a picture for Innovative Industrial Properties, KushCo, and Origin House. You need to be aware of their risks as well as their opportunities.

All three of these stocks have valuations that reflect tremendous growth expectations that they might not be able to deliver. Each of the companies primarily focuses on the U.S. market, where marijuana remains illegal at the federal level. While the chances that their businesses could be disrupted by federal intervention in states that have legalized marijuana appear to be pretty low, there’s still at least a remote possibility that problems could arise.

Still, I think the long-term prospects should be good for all three companies. Other marijuana stocks might be more in the limelight, but investors shouldn’t ignore IIP, KushCo, and Origin House.

More at: Fool.com

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