Back in October 2018, I made a special stock recommendation to folks who attended our historic online "American Cannabis Summit." (If you still haven't seen it, click here; it's free.)
The stock was - and is - a real rarity in the cannabis sector, and here's why...
It's massively profitable, it trades, liquid as water, on the "Big Board" of the New York Stock Exchange, and - best of all - it pays 2.31% in a cold, hard cash dividend.
Now, the dividend alone is enough to double your investment over the five years it'll take for the legal marijuana market to hit $146.4 billion.
But the share price has far surpassed my (admittedly conservative) estimates...
This cannabis stock is up more than 53% since my initial recommendation; it was a port in a storm during pot stocks' rocky fourth quarter. That's around 1% every day, and at this rate, the price should be four times what it is this morning in about a year.
Like I said, some people have already had the chance to participate in these remarkable profits, but now it's time to let everyone in on the secret behind these superior returns...
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Come for the Rapid Gains; Stay for the Steady Income
Forty dollars a share is a distant memory for people who moved on my Innovative Industrial Properties Inc. (NYSE: IIPR) recommendation, which sits north of $66 right now.
This company occupies a unique and very sweet "spot" in the legal cannabis sector.
STAKE YOUR CLAIM: Three pot stocks in particular could be poised for rare, wild gains of up to 1,000%. Click here to learn how you could see a $2 million "pot payday"...
It's a special kind of company called a real estate investment trust (REIT).
A REIT buys commercial real estate buildings, sometimes spending a lot on improving them, leases out the space, and manages the property. It then collects rent, or lease payments, from its tenants and hopes to eventually sell the property for a lot more than it paid for it.
But Innovative Industrial can charge a huge premium for what it does simply because it's willing to serve cannabis companies.
In fact, Innovative Industrial only buys properties from licensed medical marijuana companies.
And it just picked up a biggie...
Last week, it closed another real estate transaction. It bought a cannabis cultivation facility from a company that has been operating cannabis facilities in California for 10 years.
The company paid $6.7 million up front for the building, located in Sacramento, and is leasing the property back to the operator. Innovative also committed to investing an additional $4.8 million to improve the property.
With this transaction, Innovative Industrial now owns 12 buildings across major marijuana markets in 10 U.S. states, including the high-growth markets of Massachusetts, New York, and now California.
This process of selling and leasing back the property (which is called sale/leaseback transactions) may seem unnecessary, but it provides a valuable service.
By doing so, Innovative Industrial effectively acts like a bank. It gives precious capital to a growing company that has money tied up in real estate. It then charges interest in the form of rent to continue to use the property.
And since most banks (though not all) are still leery of working with cannabis companies, Innovative Industrial can charge much higher rent.
And like I said, this higher rent compounds beautifully.
Innovative Has a Massively Profitable Business Model
This REIT earns a stunning 15% on the money it spends to buy the cannabis building. This is two to three times what most landlords can charge on commercial real estate.
And because it's a REIT, at least 90% of this income makes its way to your pocket in the form of dividend checks.
LEGAL WAVE: Barriers to marijuana could be tumbling in Mexico and Thailand, but it's here in the U.S. where legalization could spark a "Green Rush" in certain stocks. Click here to learn about three of them...
It's this outsized income that has drawn the eye of the investment community and helped drive the stock higher over the last few months.
And the company isn't even fully invested.
It has about $130 million in cash sitting on its balance sheet, which is nearly half of its assets. Once the company deploys this cash, the income it can earn basically doubles.
And just two days ago, the company announced that it is raising another $125 million through a convertible note. If this closes, Innovative Industrial will have even more money to put to work.
The deal doesn't necessarily need to close, from our perspective, because even after deploying the cash it already has, the company will still be underutilizing its assets.
That's because REITs borrow money to buy real estate just like you borrowed money to buy your home. For a typical REIT, one-half to two-thirds of its real estate is financed through debt.
And borrowing is a way to leverage assets and magnify profits. So, once Innovative Industrial invests all of its cash, it can triple its assets - and income-generating power - without having to offer more stock; without having to further dilute shareholders.
If we revisit some simple math, two multiplied by three is six... Six times more income.
And the final kicker comes when other commercial property buyers are willing to pay up for those outsized lease rates.
Stated differently, paying more for higher lease rates means that lease rates on cannabis properties will come down to normal levels.
Falling rents may not sound like something you want as a property owner, but what's really happening is that the price of the property rises to reflect the higher income. If you own the property - or the REIT - before that happens, it's a powerful boost to the value of your real estate.
In fact, rental rates on cannabis-focused commercial real estate falling to half current levels means the value of the property will rise by a factor of nearly 11.
This means that Innovative Industrial has the potential to return 1,000% on the assets it already has simply through the normalization of cannabis in the United States. Plus, you get income while you wait for that to happen.
You won't find Innovative Industrial in many breathless articles about the booming, exciting cannabis sector; it's a quiet kind of outperformer, a hidden gem.
But it's hardly the only cannabis segment capable of delivering a shot at multiplying a small initial stake many times over...
One Cannabis IPO Returned 11,170%
Cannabis legalization is going to be the high-profit story of the next decade or more; ending prohibition could legitimize hundreds of billions in black-market sales, which could mean massive revenue and profits for cannabis entrepreneurs and investors.
All kinds of companies are going to want to surf that massive potential "wealth wave," which I think could spark a cannabis IPO boom like we've never seen before.
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About the Author
Greg Miller started working on Wall Street in September, 1987, just a month before the “Black Monday” stock market crash.
During his career there, he became an expert in just about every kind of publicly traded security - from blue-chip and small-cap stocks to municipals, junk bonds, and derivatives. As a portfolio manager, Greg was responsible for over $500 million of assets in mutual funds and insurance company accounts.
After leaving the Street, he designed a successful options trading strategy and made lucrative tech investments for a financial publication. He has also helped develop new products and worked with other editors to hone their strategies. He’s always been dedicated to deep, fundamental research - and he always will be - because he believes buying the very best companies at the right price is the best way to amass wealth in the stock market.