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3 Stocks That Provide a Safer Way to Invest in Cannabis

Not everyone can invest directly in marijuana stocks. Last year, for example, according to Military.com, Department of Defense employees were warned that investing in marijuana companies could hurt an employee's security clearance. Other private employers, particularly contractors that interact with the federal government, may have similar policies against such investing by employees.

One way to skirt that obstacle is by investing in companies that are only tangentially connected to the cannabis industry. Here are three stocks that, because of that layer of distance, may be safer for some employees to invest in. They may also be safer from a financial standpoint.

Hundred dollar bill cut into the shape of a marijuana leaf.

Image source: Getty Images.

A green thumbs-up for Scotts Miracle-Gro

Scotts Miracle-Gro (NYSE: SMG), through its subsidiary, Hawthorne Gardening, provides cannabis companies with supplies for hydroponic and indoor growing. The company said it is seeing growing profits from Hawthorne, with the subsidiary showing a 60% rise in revenues in the second quarter; management predicts sales growth of 30% to 35% for Hawthorne for the full year. Hawthorne is on track for as much as $1 billion in sales this year, having achieved $428.8 million through six months.

That certainly hasn't hurt share the price for Scotts, which is up more than 35% year to date and more than 40% over the past 12 months.

Innovative Industrial Properties is crucial to the cannabis industry

Innovative Industrial Properties (NYSE: IIPR), a real estate investment trust that concentrates on industrial buildings and greenhouses related to cannabis, has seen its stock rise more than 23% year to date. In the first quarter, the company said its revenues were $20.6 billion, a rise of 214% year over year. Its net income in the quarter of $11.5 billion was equally impressive, as it represented a rise of 248% over the same quarter in 2019.

Unlike most of the companies it leases property to, Innovative Industrial Properties has recorded four consecutive years of revenue growth and two consecutive profitable years. The company specializes in triple-net leases to marijuana companies, which means that its tenants pay all property expenses, including taxes, rent, insurance, and utilities.

In the past three years, the company has nearly doubled its quarterly dividend, now at $1.06 per share. 

Constellation is betting that Canopy's star will rise

Constellation Brands (NYSE: STZ.B) is best known for its Corona and Modelo beers, Robert Mondavi wines, and SVEDKA vodka, but it has a minority interest in Canopy Growth (NYSE: CGC), a Canadian medical marijuana company. With so many bars closed because of the coronavirus pandemic, Constellation said its sales were up only 3% for the year. Canopy's sales were up 76% last year, but it also sustained losses of $1.3 billion. However, Constellation, with a reported $8.3 billion overall in sales last year, can afford to take the long view toward Canopy. In May, Constellation increased its ownership share in Canopy from 5.1% to 38.6%.

A big key going forward is that last October, Canada approved "Cannabis 2.0" offerings -- marijuana-infused products including beverages and edibles. Canopy has just begun to market THC-laced beverages and other products, such as cannabis-infused chocolates. In the fourth quarter, the company did $6.3 million in Cannabis 2.0 sales, a rise of 34% quarter over quarter.

Constellation's stock is down 4.1% year to date, and the stock is trading roughly $20 below its 52-week high. However, as coronavirus restrictions have slowly opened up recently, the company's stock is up more than 8% over the past three months. Canopy's stock, down nearly 15% year to date, has rebounded as well and is up more than 18% the past three months.

"Safe" is still a relative term in the cannabis sector

No one denies the growth potential of cannabis stocks, but it's easy to spot the abundant risks in any growing industry -- changing regulations, too much supply, too much competition. Scotts Miracle-Gro, Innovative Industrial Properties, and Constellation are ancillary players in the industry, well positioned to sidestep most of those risks, but not all.

Of the three, I like Scotts the most. Even if things slow for the cannabis industry, the coronavirus shutdown has led people to focus more on their lawns and gardens, and that's a trend that will likely continue even after the shutdown ebbs.

Constellation presents the greatest risk of the three, but its financial backing means that it can afford to wait until Canopy turns things around, and then it could present the biggest upside of the three stocks.

Innovative Industrial Properties is also a solid play for now, as more marijuana growing companies are poised to enter the industry and they will need facilities. However, a substantial downturn for the industry, similar to what the retail sector has seen, could leave the company with empty buildings, so there's more long-term risk here than with Scotts.

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Jim Halley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Innovative Industrial Properties and Scotts Miracle-Gro. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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