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Innovative Industrial Properties Stock a Great Way to Play Pot Se…

By George Leong, B.Comm. Published : February 8, 2023

Innovative Industrial Properties Stock a Great Way to Play Pot Sector

IIPR Stock Represents a Long-Term Opportunity

Marijuana stocks briefly attracted investors’ attention following the 2022 mid-term elections, when Maryland and Missouri voters approved legalizing recreational cannabis. While federal decriminalization of recreational pot has yet to materialize, the White House will pardon people who were convicted of simple possession of marijuana. This is a step in the right direction.

Unfortunately, cannabis stocks have failed to gain traction. The ETFMG Alternative Harvest ETF (NYSEARCA:MJ), a marijuana exchange-traded fund (ETF), declined to its record low of $4.02 on December 28, 2022. The ETF has rallied by about 12% since then, but I don’t expect any sustained increases, given the current macroeconomic environment.

Some of the biggest pot companies have begun delivering positive earnings before interest, taxes, depreciation, and amortization (EBITDA). A few of them are also profitable. They have a long way to go, but the long-term outlook for pot stocks is bullish.

Investors could choose to accumulate shares of marijuana stocks on their price weakness, but there’s also an alternative way to play the growth of the marijuana sector. Consider Innovative Industrial Properties Inc (NYSE:IIPR), a real estate investment trust (REIT) that leases properties in the U.S. to regulated medical cannabis companies.

Innovative Industrial Properties stock takes the guesswork out of having to pick stocks of specific marijuana producers or retailers. Moreover, IIPR stock currently pays quarterly dividends of $1.80 per share, for a yield of 7.9%.

Shares of Innovative Industrial Properties went on an impressive run from $14.50 in December 2016 to its record $288.02 in November 2021. This translated into a healthy compound annual growth rate (CAGR) of about 80%.

In January 2022, Innovative Industrial Properties stock failed to hold its trendline support, falling to key support around $82.0 prior to its recent rally. At this point, the stock is down by about 60% from its high and appears to have formed a base at $82.00.

In February 2022, a death cross pattern surfaced on Innovative Industrial Properties Inc’s stock chart when IIPR stock was trading around $220.00. A death cross occurs when the 50-day moving average (MA) breaks below the 200-day MA.

Chart courtesy of StockCharts.com

The death cross pattern remains in place, but it could be on the verge of reversing. If Innovative Industrial Properties stock’s 50-day MA breaks above its 200-day MA—and its relative strength and moving average convergence/divergence (MACD) strengthen—IIPR stock could target $116.30 and $130.32.

A big upside move could drive Innovative Industrial Properties stock toward $170.00. The downside risk with Innovative Industrial Properties Inc is $82.00.

Chart courtesy of StockCharts.com

Innovative Industrial Properties Inc’s Financials Improve

Innovative Industrial Properties’ revenues rose by 3,096% from 2017 to their record $204.5 million in 2021. Its generally accepted accounting principles (GAAP) diluted earnings per share (EPS) also rose significantly from 2017 through 2021.

Fiscal Year Revenues (Millions) GAAP Diluted EPS
2017 $6.4 -$0.13
2018 $14.8 $0.75
2019 $44.7 $2.03
2020 $116.9 $3.27
2021 $204.6 $4.55

(Source: “Innovative Industrial Properties Inc.” MarketWatch, last accessed February 7, 2023.)

The company hasn’t reported its full-year 2022 financials yet, but its rolling 12-month revenues to September 2022 jumped to $264.8 million.

For 2022, Innovative Industrial Properties Inc expects to beat the consensus estimate of $275.5 million in revenues. That would be a year-over-year increase of 4.7%. For 2023, analysts estimate that the REIT’s revenues will be $291.1 million. (Source: “Innovative Industrial Properties, Inc. (IIPR),” Yahoo! Finance, last accessed February 7, 2023.)

Analyst Take

I view Innovative Industrial Properties Inc’s current share-price weakness as a contrarian investment opportunity.

The company has been growing its revenues, it’s profitable, and it pays out high-yield dividends. Therefore, IIPR stock is a good way to play the growth of the marijuana industry.

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