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Innovative Industrial Properties(IIPR-N)

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Prediction: These Could Be the Best-Performing Cannabis Stocks Through 2030

Motley Fool - Sat Aug 26, 2023

After Canada legalized adult uses of cannabis in 2018, investors rushed to invest in pot companies, expecting many other countries in the Western hemisphere to follow suit and anticipating excellent returns from the sector. That hasn't panned out -- quite the opposite, actually. The cannabis industry has been a massive disappointment, and the collective performance of marijuana stocks has been abysmal. Are there any marijuana companies still worth investing in?

Let's consider two candidates: Jazz Pharmaceuticals(NASDAQ: JAZZ) and InnovativeIndustrial Properties(NYSE: IIPR). Why? Because these two have performed much better than their cannabis peers. The chart below compares Jazz Pharmaceuticals' and Innovative Industrial Properties' performance in the past five years against an industry benchmark and other prominent pot stocks.

Chart showing Jazz Pharmaceuticals and Innovative Industrial Properties outperforming seven other major cannabis companies in 2023.
JAZZ data by YCharts.

In fairness, Jazz Pharmaceuticals has only been a cannabis company since May 2021, when it completed the acquisition of GW Pharmaceuticals, a cannabidiol (CBD)-focused drugmaker. Still, it has also performed better than other companies within the industry since then. Jazz Pharmaceuticals' and Innovative Industrial Properties' pasts are no guarantee of future success, but there are key reasons why they have been able to beat their peers, and these reasons could help them remain the leading performers in the industry through the end of the decade.

Where is the industry headed?

Let's first turn to an important question: How will things evolve in the marijuana industry through 2030? While it's hard to say, here are some possibilities. There is a chance that cannabis could become legal in several more countries in the Western world, perhaps even in the U.S. Several surveys have shown that a majority of Americans now support legalization.

That doesn't guarantee that it will happen, but the fact that support for it is now pretty high certainly doesn't make it less likely. Still, as the Canadian experience has taught us, legalization alone isn't enough for cannabis companies to thrive. So even if the laws in the U.S. ease up, there could be plenty more that limits the ability of pot growers to make consistent money and deliver market-beating returns.

So, while the future of the industry looks uncertain one thing seems certain, it isn't going away. The market seems to have already factored in the worst possible outcome. What about Jazz Pharmaceuticals and Innovative Industrial Properties?

1. Jazz Pharmaceuticals

Jazz Pharmaceuticals' status as a biotech company has been a protection. While it needs to comply with plenty of laws and regulations to develop and launch its products on the market, it does not suffer from the same legal challenges pot growers in the U.S. face. Marijuana remains illegal at the U.S. federal level, which makes it hard for cannabis companies to raise funds in traditional ways.

It also means they can't cross state lines with their products, which obviously makes it more challenging for them to operate across multiple states. Jazz Pharmaceuticals doesn't have these problems. One of the company's key assets is Epidiolex, a CBD-based medicine that treats a pair of rare forms of epilepsy. Jazz Pharmaceuticals' best-selling product is Xywav, a treatment for daytime sleepiness caused by narcolepsy.

The company's portfolio also features a duo of cancer medicines, Zepzelca and Rylaze. While its core products are performing relatively well, others are struggling, and Jazz Pharmaceuticals' top line isn't growing very fast. In the second quarter, the company's revenue of $957.3 million was up by only 2.6% year over year. Jazz's adjusted net earnings per share of $4.51 rose by almost 5% year over year.

Jazz's Xyrem, also a narcolepsy treatment, is losing steam. Many of its patients are switching to Xywav, which is a better product (contains less sodium), but has also been facing generic competition since January. Xyrem's and Xywav's combined sales dropped during Q2. Still, Jazz Pharmaceuticals' four most important products have all been on the market for only about five years or less, and most should add label expansions.

Jazz Pharmaceuticals also has several other new pipeline products it is working on. The company's nabiximols, another potential CBD-based therapy, failed to prove effective in a phase 3 study targeting multiple sclerosis spasticity in mid-2022. That was a significant setback for Jazz Pharmaceuticals. However, if it can pull off consistent clinical and regulatory wins through the next few years, it could remain one of the best-performing cannabis stocks.

2. Innovative Industrial Properties

Innovative Industrial Properties is a real estate investment trust (REIT) that caters to medical cannabis companies in the U.S. It helps cannabis players save money by purchasing real estate properties from them and leasing those properties back to the same companies, allowing them to free up much-needed cash to run their operations. Innovative Industrial Properties has also successfully avoided many legal challenges pot stocks face, but not everything has been rosy for the REIT.

First, revenue growth has slowed. In Q2, Innovative Industrial Properties' top line of $76.5 million increased just 8% compared to the year-ago period. The company's earnings per share (EPS) increased by just 1.4% year over year to $1.44.

Chart showing Innovative Industrial Properties' revenue falling since early 2021.
IIPR Revenue (Quarterly YoY Growth) data by YCharts.

Second, Innovative Industrial Properties has had to deal with some of its tenants defaulting on their obligations. The cannabis industry has been struggling, and that's showing up on Innovative Industrial Properties' results, even if it does not grow marijuana itself. The company's performance could pick up if things improve in the industry. And even if cannabis becomes legal at the federal level in the U.S., that wouldn't sink Innovative Industrial Properties' prospects.

Dealing with traditional banks to raise funds has its drawbacks, too (high interest rates, for instance). Furthermore, maintaining real estate assets is expensive. No doubt many cannabis companies will still make the best use of Innovative Industrial Properties' services instead of choosing to burden themselves with these responsibilities. Innovative Industrial Properties currently does business in 19 states, whereas medical uses of cannabis are legal in 38 states and several territories.

That gives the company plenty of opportunities in the coming years.

Worth adding to your portfolio?

Outperforming the cannabis sector is one thing, but it is not particularly impressive considering what has transpired in recent years. But doing better than the broader market is another. Can Jazz Pharmaceuticals and Innovative Industrial Properties get that done between now and 2030? In my view, the answer is probably no for the former. Jazz Pharmaceuticals' mid-term outlook looks bleak as the company struggles to grow revenue at a good clip even with a portfolio of new approvals. Investors should probably stay away from this stock.

Innovative Industrial Properties looks more promising, especially if the broader marijuana industry bounces back and performs well through 2030. Innovative Industrial Properties is also worth considering for those looking for dividend stocks.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.

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