In 2018, the Canadian cannabis market reached peak valuations and since then the industry has been under considerable pressure. Although most cannabis companies have been under pressure, there are a handful that have executed on previously announced initiatives and are considered to be industry leaders.=

One of the most interesting traits that we have found among the cannabis companies that have performed well over the last two years is that they do not touch or sell cannabis. From real estate investment trusts (REITs) to pharmaceutical companies, several of the top performers are considered to be ancillary cannabis companies.

The term ancillary is used very broadly in the cannabis industry and it refers to companies that are levered to the sector but do not touch the plant. These businesses may lease space to cannabis cultivators or deliver consumers cannabis that has already been purchased at a dispensary. These companies may sell the nutrients, lights, and soil to cultivate cannabis and we are favorable on the benefits that these companies receive when compared to companies that touch the plant.

In the US, cannabis is still illegal at the federal level and many companies cannot use banks or get insurance. These hurdles make it more challenging for plant touching businesses and that is one of the reasons we are bullish on ancillary companies. Once cannabis is legalized or decriminalized in the US, restrictions should ease and this is a trend that we are closely following.

Today, we want to highlight 5 ancillary cannabis companies that have been executing on previously announced initiatives and that our readers need to be aware of. Several of the operators have recorded impressive gains over the last two years and we want to provide more insight on this vertical of the cannabis industry.

GW Pharmaceuticals: A Cannabis Biotech Leader

GW Pharmaceuticals plc (Nasdaq:GWPH) was the first pure play biotech company to trade on the Nasdaq and be focused on the development of cannabis based treatments for illnesses including multiple sclerosis and serious forms of epilepsy (Dravets and TSC).

Over the last five years, GW has been nothing short of an execution story and brought the first FDA approved cannabis-based treatment to market in the US. A few weeks ago, the biotech cannabis company reported quarterly earnings and generated more than $120 million of revenue during the period.

Currently, GW has a valuation that is north of $3 billion and is focused on bringing additional treatments to market. The company has a deep pipeline of treatments that are in advanced stages of FDA testing and has substantial potential catalysts for growth. Going forward, the future for GW is bright and is an opportunity that we will continue to follow.

Driven Deliveries: A Best In Class CannaTech Leader

Delivery companies have been major beneficiaries of the COVID-19 pandemic as consumers try to stay indoors and avoid crowded areas. This trend has also played out in the cannabis industry and this is a vertical that we are bullish on. Currently, there are a limited number of cannabis delivery companies and Eaze is the best known brand.

Although we are impressed with how Eaze has capitalized on the cannabis industry, we are not enthused with the platform from a technology standpoint and believe that Driven Deliveries (OTCQB:DRVD) is an opportunity that is flying under the radar. During the pandemic, Driven has been steadily increasing its market share in California and this is a trend that we are bullish on.

When compared to Eaze, Driven has a much better platform from both a consumer and a brand standpoint. Last month, Driven Deliveries released second quarter financial results and reported record revenue of $5.7 million. The cannabis delivery company reported impressive growth in almost all key metrics (i.e. revenue, margins, guidance, and EBITDA) and we expect it to continue to be a beneficiary of the positive trend toward delivery services.

When compared to the prior quarter, Driven recorded a more than 150% increase in revenue and the growth was driven by the impact of its strategic plan to become a “direct-to-consumer” e-commerce business and discontinue its dispensary-to-consumer delivery business. During the quarter, Driven’s online retail divisions, Ganjarunner and Budee, serviced more than 244,600 registered cannabis consumers. When compared to the first quarter, the company completed twice as many orders in the second quarter and we believe that Driven has an attractive growth profile based on the increase in orders, customers, and the higher retention rate. Driven was able to substantially grow the business while being able to lower the average new customer acquisition cost and we expect this to lead to continued margin expansion.

At current levels, we believe that Driven represents an attractive growth opportunity and are of the opinion that the business is flying under the radar. The company is well positioned to thrive in the current market environment, and we are favorable on the direction that the management team is bringing the business.

IIPR: Delivering Value For Investors All Around

Innovative Industrial Properties Inc. (NYSE:IIPR) is another great example of an ancillary cannabis company and is the largest cannabis REIT in the US. Since 2019, the company’s stock price has appreciated by more than 500% and is an opportunity that has attracted institutional investors.

Since cannabis is still illegal in the US at the federal level, the cannabis REIT is able to charge tenants a massive premium and this has played a key role in the success of the business. 2020 has proven to be a banner year for Innovative Industrial Properties and it has already announced several substantial acquisitions this year.

We expect Innovative Industrial Properties to continue to make acquisitions and expand its footprint in strategic cannabis markets. The company is working with leading multi-state operators in the US and we are favorable on this aspect of the story. The quality of the operators that Innovative Industrial Properties works with leaves us with a positive view on its ability to collect rent and this is an important trend for the current market environment.

Scotts Miralce Gro: The Largest “Cannabis Stock” By Market Cap

Scotts Miracle Gro (NYSE:SMG) has recently come on the radar of major financial institutions as one of the greatest beneficiaries of the legal cannabis movement. Back in 2014, we identified Scotts as one of the best ways to be levered to the cannabis industry without actually touching the plant and as of late the stock has been a top performer.

A few weeks ago, Scotts released third quarter financial results that came in well above Wall Street estimates and reported continued strength from both its US Consumer and Hawthorne segments. The outperformance of these two divisions resulted in Scotts reporting a 28% increase in sales growth and a 22% improvement in non-GAAP adjusted earnings. One of the most significant parts of the earnings result is related to how Scotts raised its guidance for full-year sales, adjusted earnings and free cash flow.

We consider Scotts Miracle-Gro to be one of the best positioned ancillary cannabis companies. So far this year, the company’s US Consumer segment accounted for $2.33 billion of sales (which represents approx. 15% growth when compared to the same period last year. Scotts’ Hawthorne division represented a major growth driver in the quarter, and this is a trend that we are bullish on. So far this year, Hawthorne has recorded a 59% increase in sales, and we will monitor how the division continues to ramp up.

Another important aspect of the earnings report is related to Scotts’ revised sales guidance of 26 to 28% growth. The guidance assumes that the US Consumer segment will grow 20% to 22% while Hawthorne sales will increase by 55% to 60%. Entering June, the company said it expected U.S. Consumer sales to increase by 9% to 11% while Hawthorne was expected to increase by 45% to 50%.

Scotts has been a top performer so far this and Wall Street (and CNBC) seem to have fallen in love with it. Several leading Wall Street broker-dealers raised their price target on Scotts after the earnings beat and this is a trend that we are favorable on. As the cannabis industry continues to grow, we expect Scotts to be a beneficiary of the trend and is an opportunity that we will continue to closely follow.

Grow Generation: Business Is A Boomin

GrowGeneration Corp. (Nasdaq:GRWG) is a leading hydroponic retailer in the US and has been one of the best performing cannabis stocks. During the last month, the stock has gone parabolic and is trading above the $20 level.

Earlier this year, GrowGeneration was approved to uplist to the Nasdaq from the OTC and this represented a major milestone for the company as well as the entire industry. The leading hydroponic retailer has been quietly executing on a coast-to-coast growth strategy and has been rapidly opening new stores.

Following the recent surge to the upside, we are carefully watching GrowGeneration. The rally comes after the company smashed earnings expectations and guided higher for the rest of the year. Wall Street responded favorably to the beat and the stock has been climbing higher on heavy trading volume.

Following a massive move to the upside, GrowGeneration has come under pressure and we have been following the recent trend. Since GrowGeneration trades on the Nasdaq, major investment firms can buy the stock and this has played an important role in the recent rally. The management team has done a fantastic job at bringing the business down a path to profitability and is an opportunity to be aware of.

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