My best marijuana stock didn’t start out that way. It was a “safe” pick. Here’s the story.
Every December, near the end of the month, each of the analysts at Cabot (there are nine of us) selects one stock that they think will be their top-performing stock of the year—and writes a paragraph or two explaining why.
These picks are then distributed to various media, including Wall Street’s Best Dividend Stocks, which we publish.
The stock picks make for good reading—but it’s a silly contest. Who buys a stock for exactly a year? No one.
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You buy a stock when it looks ripe—when it meets your investment criteria (like these, if you are a value investor)—and you sell it when it no longer meets your criteria.
In this case, however, the calendar rules—and you have to hold the stock for the whole year—so when I chose my best marijuana stock last December from Cabot Marijuana Investor, I chose one of the safer ones, one that wouldn’t blow up during the year—one that promised good, but not spectacular returns.
And then I forgot about it.
I didn’t forget about the stock, of course. Every day I monitored it in my portfolio and every week I wrote an update, apprising my readers of the stock’s action and the company’s progress.
But I did forget about the stock-picking contest.
Until late June when I was asked to do a mid-year update and I noticed that the “safe” marijuana stock I had selected had gained—in just six months—a jaw-dropping 170%! It had become my best marijuana stock.
Here’s what I wrote back in December about my best marijuana stock pick.
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Innovative Industrial Properties (IIPR)
“Innovative Industrial Properties is a real estate investment trust (REIT) dedicated to the cannabis industry—which is the fastest-growing industry in the U.S. The stocks in the cannabis industry are notoriously volatile, in part because they’re often low-priced and thinly traded, but IIPR is far less volatile, while still holding the promise of great growth.
The company has eleven properties in nine states (Arizona, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York and Pennsylvania), totaling more than a million rentable square feet. All properties are currently leased with a weighted-average remaining lease term of approximately 14.7 years.
Dividends are paid quarterly, and currently yield 2.8%. Analysts are projecting earnings of $0.76 per share in 2018 and then $1.97 per share in 2019. And the stock is currently on a normal correction, having pulled back 24% from its November high. I like it both for the year ahead and longer-term.”
In retrospect, that was a pretty sober recommendation. Just the facts. No hyperbole. But last December was a pretty sober time for investors, as that mention of a “normal correction” of 24% might remind you.
Here’s what the chart looked like then.
That, of course, was a great time to buy many stocks—right near what turned out to be a new major market low.
But why did IIPR do so much better than most?
First, the cannabis sector as a whole has done very well, gaining a massive 49% in the first three months of a year before pulling back with the broad market.
Second, the REIT sector has also done well, gaining 22% in the first half of the year.
Third, Innovative Industrial Properties has done exceptionally well as a company. Instead of earning $0.78 per share in 2018, as analysts expected, the company earned $1.30. (Technically, it’s not earnings, but funds from operations.)
Fourth, IIPR is the only REIT dedicated to serving the fast-growing cannabis industry. Its business is totally legal in all states, and it’s totally free to use the banking system, unlike most companies in the cannabis industry. As a result, institutional investors have no reservations about investing in it. Blackrock alone owns 15%!
Fifth, and perhaps most important, is management. While most cannabis companies are young and management is often inexperienced, Innovative Industrial Properties boasts excellent, experienced management. At the top of the company is Executive Chairman Alan Gold, who previously helmed BioMed Realty Trust (a REIT specializing in space used for the life science industry) for 12 years until it was acquired in 2016.
Also, as expected, the firm is growing fast. It now has 22 properties in 11 states, totaling 1.7 million sq. ft., which are 100% leased—and first quarter revenues were up 146% from the year before. That’s rapid growth!
The quarterly dividend, which was $0.35 back in December, is now $0.60, representing a huge hike of 71%. But because the stock has advanced so much, the stock now yields “only” 1.9%—which is low for a REIT, but high for a marijuana stock.
Here’s the chart today.
Long-term prospects remain great for the IIPR, but short-term, the stock grew severely out of trend to the upside in early June (up 64% in three weeks), so on June 20 (the exact top, so far) I recommended that my readers take partial profits (I suggested selling one-third) while holding the rest of their positions long term.
Since then, the stock has maintained its altitude well, and this pattern may evolve into a base that launches the stock into a renewed uptrend.
Alternatively, the stock could cool off further, and the stock’s 50-day moving average, now down at 97, would be a sensible target.
For more info on my best marijuana stock, click here.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More