Bigfoot. The Loch Ness monster. Profitable pot stocks -- All three things are rumored to exist but are very hard to find.
Investors have good news, though: It's not impossible to find the third item on the list. While most cannabis-related companies remain unprofitable even when their sales are soaring, there are a handful of businesses operating in the cannabis industry that are actually generating solid earnings.
The five most profitable pot stocks on the planet (based on profit margin) right now are Innovative Industrial Properties (NYSE: IIPR), Constellation Brands (NYSE: STZ), Altria Group (NYSE: MO), Charlotte's Web Holdings (NASDAQOTH: CWBHF), and Scotts Miracle-Gro (NYSE: SMG). They are ranked below in order of profit margin. Here's why they're making money while most other cannabis stocks aren't.
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1. Innovative Industrial Partners
Innovative Industrial Partners (IIP) ranks at the top of our list with a profit margin of more than 51%. The company operates as a real estate investment trust (REIT) and focuses on leasing properties to the medical cannabis industry.
The secret to IIP's terrific profit margin is that it leases out 100% of the 19 properties that it owns. The weighted-average remaining lease term for its properties is over 15 years. These long-term leases give the company ample cash to reinvest into additional properties to lease out. This "rinse and repeat" formula enabled IIP to increase its net rental revenue by 146% and its earnings by 444% year over year in the first quarter of 2019.
2. Constellation Brands
Constellation Brands qualifies as a pot stock thanks to its 38% ownership of leading Canadian cannabis producer Canopy Growth (NYSE: CGC). But while Canopy Growth isn't profitable yet, Constellation is. The company's profit margin tops 42%.
Premium beers like Corona and Modelo have fueled Constellation's nice profits. Overall beer sales in the U.S. are falling, but Constellation's product lineup has been able to buck the trend. The company's beers drove 40% of the growth in the U.S. high-end beer category last year and all of the growth in the import segment. Constellation thinks that its expansion into the cannabis industry will help it deliver even bigger profits.
Altria is another company that makes the list due to a major investment in a Canadian cannabis producer. It spent around $1.8 billion earlier this year for a 45% stake in Cronos Group (NASDAQ: CRON). Altria's profit margin of 32% comes from tobacco rather than cannabis, though.
The problem for Altria is that its profits are under heavy pressure. In Q1, the company's adjusted net income fell 6% year over year. Altria recognizes that the general decline in cigarette smoking isn't likely to reverse. That's why the tobacco giant has invested in other opportunities like cannabis that CEO Howard Willard thinks have "tremendous potential for growth."
4. Charlotte's Web
Charlotte's Web claims the No. 1 market share in the world for its hemp cannabidiol (CBD) wellness products. The popularity of its products has helped the company achieve a solid profit margin of 14%.
But Charlotte's Web posted lower earnings in Q1 than it did in the prior-year period. Is that reason to be concerned? Nope. The company is investing in building out its infrastructure to support future growth. With the U.S. legalizing hemp in December 2018, Charlotte's Web should have plenty of more growth on the way.
5. Scotts Miracle-Gro
Scotts Miracle-Gro decided several years ago to place a big bet on cannabis. After a string of acquisitions, the company now ranks as the top supplier to the cannabis industry for hydroponics, lighting systems, ventilation systems, and other products important to growing cannabis indoors. Scotts' profit margin of close to 9% isn't as impressive as the other companies in our top five, but this margin should improve in 2019.
Although its cannabis-focused Hawthorne subsidiary generated a profit in the last quarter, the company makes most of its money from its consumer lawn and garden products. This business is booming in 2019, with CEO Jim Hagedorn saying recently that "consumers came flying out of the gate" in the company's fiscal second quarter. Over the long run, though, Hawthorne is likely to become much more important for Scotts' bottom line.
The best pick
I like several of these profitable stocks. Innovative Industrial Properties and Scotts Miracle-Gro should benefit from the expansion of the U.S. marijuana market. Charlotte's Web is poised to grow as the U.S. hemp CBD market expands.
Constellation Brands could be the best pick of all, though. The company's core premium beer business continues to perform very well. Its investment in Canopy Growth should pay off handsomely with Canopy succeeding in the Canadian adult-use market, European medical cannabis markets, and the U.S. hemp market.
My view is that Canopy Growth is on track to achieve profitability. When it does, Constellation's profit margin will increase, making this profitable pot stock even more attractive.
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