You’ll want to keep these growth stocks on your watch list.
Oct. 13, 2020
This article originally appears on The Motley Fool, written by David Jagielski.
When the market crashed in March, many investors were left flatfooted, unsure of what to do. Berkshire Hathaway vice chairman Charlie Munger used the word “frozen” in an interview with The Wall Street Journal when describing the public’s reaction to the markets earlier this year, admitting that he himself had no idea what was ahead for the economy.
And that’s why many people missed the deals that were right in front of them: because the crash was so unexpected and unpredictable. You can be prepared for the next crash — even if it’s not as drastic — by pinpointing investments that you’ll want to target when it happens. These three stocks in particular could become great buys: Canopy Growth, Roku, and Innovative Industrial Properties.
1. Canopy Growth
This Canadian pot producer has seen better days, struggling to grow sales during what management has admitted is a “transition year.” But new CEO David Klein, who came over from Constellation Brands this year, is working to improve the Ontario-based company’s bottom line. In April, Canopy Growth announced it would be altering its strategy and moving out of some markets, including Lesotho and South Africa, while scaling back operations in other parts of the world. It’s also laid off hundreds of workers this year as it looks to strengthen its margins.
The company is still focused on growth, though, having shipped its first tetrahydrocannabinol (THC)-infused products in Canada March. Through its partnership with Acreage Holdings, it will be making its beverages available to the U.S. market as early as next summer. Since marijuana products remain illegal on a federal level in the U.S., marijuana products can’t cross from Canada to the U.S., nor can they cross state lines. (The only exception is hemp-based products, which contain very low levels of THC.) Because of this, it’s likely that Canopy Growth will simply share its formula for cannabis beverages with Acreage, and the company can then produce the beverages in its markets of choice.
In its most recent results, released Aug. 10 for the period ending June 30, the company reported a net loss of 128 million Canadian dollars. Canopy Growth has incurred a loss in each of its past five quarterly results. But there’s potential for the company to improve these numbers next year as its products gain more traction in both the U.S. and Canada and as it tightens its financials.
Nonetheless, you’ll want to wait for a crash or a sizable drop in price before buying shares of Canopy Growth. That’s because the stock is expensive when compared to its peers on a price-to-sales (P/S) basis. Canopy has potential, but its current valuation is overdone.
Unlike Canopy, Roku doesn’t need a transition plan or a turnaround; the business is doing great amid the coronavirus pandemic. With people spending more time at home watching television, the Los Gatos, Calif., company has seen strong results this year. In its second-quarter results, released Aug. 5 for the period ending June 30, the company reported that its users streamed 14.6 billion hours of content, a year-over-year increase of 65% and a notable jump from the 12.3 billion hours Roku reported in the first quarter.
Revenue of $356.1 million also grew 42% from the prior-year period. Unfortunately, with expenses also rising at a higher rate, Roku reported a net loss of $43.1 million, much larger than the $9.3 million loss it incurred a year ago. Investors are likely to accept those losses given that the company is still pumping out strong growth numbers, which could be boosted even further by the two new products the company announced Sept. 28: the Roku Ultra and Roku Streambar. The latter serves as not just a streaming device, but also a sound bar.
The only reason Roku isn’t a great buy right now is because, like Canopy Growth, it’s a bit expensive. With its stock up 67% year to date, it’s also trading at a hefty P/S ratio of about 20, one of the highest it’s seen this year.
3. Innovative Industrial Properties
Innovative Industrial Properties is a real estate investment trust (REIT) that currently trades at an even higher valuation than the other two stocks on this list, with a P/S multiple of 25. Up over 70%, it’s outperformed even Roku this year as investors have been bullish on the San Diego-based business, which is often seen as a safer way to invest in the cannabis industry.
Because of marijuana’s illegal status federally, it can be difficult for marijuana companies to raise capital to buy land or property. That’s where Innovative Industrial Properties comes in, buying properties from these companies and then leasing them back. It’s been able to score some great deals and has positioned itself for excellent growth opportunities in the industry, with ongoing acquisition of more and more property boosting its sales and profits alike.
On Aug. 5, Innovative released its second-quarter results for the period ending June 30, and sales were up 183% year over year to $24.3 million. The company also reported net income of $13 million — more than four times the $3.1 million in profit that it reported in the prior-year period. As of Aug. 5, Innovative owned 61 properties with rental square feet totaling 4.5 million. That’s more than double the 26 properties it owned on Aug. 7, 2019, when its rentable square feet totaled 2 million.
And there could be much more growth to come as voters in New Jersey, Montana, South Dakota, Arizona, and Mississippi go to the polls next month to decide whether to expand marijuana use in their states. Mississippi is only considering legalizing medical marijuana, but the rest are voting on legalization of pot for recreational use. (South Dakota is voting on both recreational and medicinal use.)
Which is the best stock to buy today?
Thus far in 2020, only Canopy Growth’s been lagging behind the S&P 500:
If you can’t wait for the next market crash and are looking to buy one of these growth stocks today, Innovative would be your best option. It’s not cheap, but the company is profitable and growing rapidly. It also pays a dividend that today yields 3.8% — better than your average S&P 500 stock, which pays close to 2%.
Ultimately, all three stocks could be solid long-term investments, but their prices today are just a tad high. That’s why you’d be better off putting them on your watch list for now, especially since a market crash could be around the corner.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
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