The first stories trumpeting the business opportunities in marijuana started popping up around 2016, as ballot initiatives that year legalized recreational marijuana in California, Nevada, Maine and Massachusetts.
The opportunity has, in many ways, lived up to that early optimism. However, in many ways the marijuana “megatrend” is now old news now that we are a few years removed — and in 2019, some of the most popular names have shown signs of stress. Most notably, $4 billion marijuana leader Cronos Group CRON, +4.36% CRON, +3.25% has plunged more than 40% from its recent highs.
The opportunity in marijuana stocks remains very real, however. And the recent stumbles of high-profile names like Cronos shouldn’t detract from the big potential in lesser-known stocks that haven’t yet gotten too far ahead of themselves.
Yes, there are also a bunch of microcap marijuana stocks out there that are incredibly risky. These companies often lack any revenue to speak of let alone profits, and late last year the Securities and Exchange Commission issued an investor alert warning against the potential for fraud in names like this.
But if you’re looking to play this high-growth trend in less conventional ways, consider these five under-the-radar marijuana stocks. They aren’t without their risks, but they are legitimate concerns with market capitalizations of $800 million or higher.
Green Organic Dutchman
With a name that’s quite a mouthful, Canada-based Green Organic Dutchman Holdings Ltd. TGODF, -4.90% TGOD, -4.70% may not be as well-known as Cronos in part because it’s so hard to fit in headlines. However, it is an established enterprise that was briefly the largest marijuana IPO during its 2018 debut, where it raised $115 million Canadian dollars.
What makes this particular growing outfit so interesting is its close proximity to hydroelectric power — and, subsequently, the potential much lower electricity rates than some of its peers. Growing greenhouses need plenty of power for lights, and this quirk of location may give Green Organic Dutchman a serious edge when it comes to profit margins. A bonus is that its products are certified organic, which may help it command a higher market rate.
To be clear, the company is still smaller than many peers with its market cap of only about $800 million even after the acquisition of European outfit HemPoland in late 2018. And it’s still burning cash as it looks to establish a much more substantial revenue stream. However it has $260 million in cash to fund expansion and operations.
While Hexo Corp. HEXO, -2.78% hasn’t garnered the same attention as some of the bigger players, it is increasingly on many pot-stock investors’ radars. That’s not simply because of its relatively reasonable valuation compared with overbought peers, either.
For starters, Hexo has “preferred supplier” status in Quebec, controlling about 50% of the recreational marijuana distribution across this Canadian province and the important urban market of Montreal. It’s a five-year deal that only began in 2018, and is a crucial foundation for this company.
This week, Canada’s competition board approved Hexo’s purchase of Newstrike Brands, a deal worth more than $260 million. It gives Hexo 1.8 million square feet of greenhouse space in four additional locations.
No wonder Bank of America just initiated coverage with a buy rating and a price target of $10 a share — more than 30% upside. This is a risky stock, but like some of the best growth names in Silicon Valley it has some impressive numbers to back it up.
Innovative Industrial Properties
The marijuana craze isn’t just about investing in stocks that grow plants. Consider Innovative Industrial Properties IIPR, +2.63% a publicly traded REIT that is designed as a way to capitalize on marijuana-related real estate.
It’s surprising to many investors to even see a firm like this exists, let alone that it’s a nearly $800 million industrial REIT that is soundly profitable and generates a 2.1% yield. Even more impressive is that those distributions have surged threefold from 15 cents per quarter in 2017 to 45 cents as of its March payday for shareholders.
Shares have skyrocketed 140% or so in the last year, partially because more marijuana-crazed investors are discovering this firm and piling in. And as a result, this cannabis-oriented REIT currently trades for a premium of almost 140% to its net asset value — amazing in itself, but even more out of whack with other REITs that generally trade for a small discount to NAV at present.
But you could argue the premium exists because the growth story is quite real. Both revenue and earnings per share are expected to more than double in fiscal 2019, a growth rate your typical mall operator simply can’t hope to match.
Aphria Inc. APHA, +2.30% APHA, +0.44% isn’t quite as popular as some of the other marijuana names, mostly because it is specialized on medical cannabis and related products. Amid all the hype about booming recreational pot use, the idea of serving primarily patients and health professionals isn’t as interesting to many investors.
That, a high-profile push by short-sellers in 2018 and weak earnings for its fiscal third quarter has caused Aphria to fall by the wayside amid the current craze for marijuana stocks.
However, this Canadian company recently noted that it saw the short-selling debacle of last year as a “wake-up call.” And after fending off a hostile takeover bid by Green Growth Brands GGBXF, -4.51% management — including a newly appointed board chairman — definitely has something to prove.
With ambitious plans to increase revenue five times by the end of 2020, this could be a high-risk but high-reward rebound play — presuming Aphria stays on the straight and narrow in 2019, of course. This is clearly a fallen angel of the marijuana industry, so buyer beware.
Most of us don’t really think of innovation when we think about the agriculture space. Sure, there are high-tech irrigation techniques and targeted pesticides developed in a lab, but farms are just farms to most of us.
Village Farms International, Inc. VFF, +16.98% is proof that innovation is alive and well, even for traditional farm outfits.
Village Farms is one of the largest greenhouse operators in North America, with some 200 acres of production from Mexico, through the U.S. and into Canada. Aside from owning its own power plant in British Columbia, it was a pretty conventional produce company that had been selling tomatoes and cucumbers to grocery stores since 1989 — until 2017, when Village Farms announced it would be pulling up a bunch of its crops and planting marijuana instead.
Admittedly, this makes the stock a bit out of place in the sector since it has an established farm business but sports a steep valuation like so many other fast-growing pot stocks. However, if you’re looking for a bit of a lower-risk way to play this trend, then it is an intriguing if indirect option.
Jeff Reeves writes about investing for MarketWatch. He holds no investments in any companies mentioned in this article.