Pubdate: Wed, 04 Sep 2019
Source: Wall Street Journal (US)
Copyright: 2019 Dow Jones & Company, Inc.
Author: Carol Ryan


Investment legend has it that the best money in the California gold
rush was made selling picks and shovels. Fertilizer and real estate
are equivalent bets on the volatile pot boom.

Shareholders in cannabis stocks have lost money lately. Companies that
"touch the plant"-those that cultivate and sell pot, such as Cronos
Group and Green Thumb Industries-have shed up to 50% of their market
value over the past six months, as worries grow about profitability in
the sector and the resilience of black-market sellers in legalized
states like California. Big corporate investors are among the
casualties: Tobacco giant Altria MO -0.58% 's 45% stake in Cronos is
now worth 10% less than the $1.8 billion the Marlboro maker paid for
it last December.

Even after the selloff, cannabis names are pricey. Shares in Canopy
Growth , CGC -3.18% the loss-making pot company in which Corona brewer
Constellation Brands owns a 36% stake, fetches 13 times next year's
projected revenue, according to FactSet data. Companies servicing the
cannabis industry look cheap and less volatile by comparison.

Scotts Miracle-Gro is a 150-year-old company that for most of its
existence made money selling lawn fertilizer to domestic gardening
enthusiasts. More recently, it has been supplying cannabis companies
in legalized markets with the equipment they need for indoor
growing-everything from horticultural lights, plant-growing trays and
air-filtration systems. In the three months through June, the division
that supplies its cannabis clients-which represents about a sixth of
revenue-grew 138% compared with the same period of 2018, although some
of this was due to acquisitions. Its stock is up over 70% so far this

Property is another way for more conservative investors to get
exposure to the cannabis industry without directly shouldering the
regulatory risk of buying stock in a grower. BlackRock Fund Advisors
and Northern Trust Investments are among the top shareholders in
Innovative Industrial Properties , a real-estate investment trust that
specializes in facilities for growing cannabis. Almost 60% of the
company's shares are now owned by institutional investors-a rarity for
pot names that rely heavily on retail shareholders.

Cannabis REITs are booming because pot companies can't get regular
mortgages while the drug remains federally illegal. "The REITs are
filling a current void in capital markets where banks would
traditionally be," says Harrison Phillips, vice president of cannabis
investment bank Viridian Capital Advisors. A sale and lease-back of
the real estate on their balance sheets offers a way for cannabis
companies to free up cash to fund their growth plans. IIP typically
makes a rental yield of 15% on these deals-double the U.S. average for
industrial property-and its NYSE-listed shares are up 96% so far this

Not all companies that service the pot industry have been good
investments. Shares in packaging companies like KushCo Holdings, which
are considered more directly exposed to the problems faced by growers,
have been battered. And other industries face their own specific
risks: If changes to federal laws make it easier for cannabis growers
to get regular mortgages, for example, IIP's attractive yields would
come down quickly.

Still, companies that sit on the sidelines of the industry may often
be a safer bet than the plant itself. Even ignoring the thorny
question of regulation, cannabis, like gold, is ultimately a
commodity, and producers have limited scope to differentiate their
output in a way that would generate long-term returns for
shareholders. Investors who have been burned should take a broader
view of the cannabis ecosystem.
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