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Investing, Stocks  | August 5, 2019

After months of basking in the glow of recreational marijuana legalization in Canada and a growing acceptance (at least at the state level) in the U.S., cannabis stocks have been getting smoked.

It’s not because anything is inherently wrong with the legal weed sector; it’s barely in its infancy. Rather, valuations got ahead of themselves (the odd scandal hasn’t helped pot stocks either).

Some investors might be spooked by the marijuana stock sell-off, but hedge funds (and the billionaire investors who own them) are focused on the fact that, between 2017 and 2021, the legal cannabis market is expected to grow at a compound annual growth rate of 27% over the next five years.

The current sell-off is just short-term noise. It’s a distraction that has created an excellent opportunity for hedge funds to pick up their favorite cannabis stocks on the cheap. Not all pot stocks have been selling off though; many have been bucking the trend and hitting new highs.

Three of the more interesting cannabis stocks that American hedge funds have been pouring their money into are Innovative Industrial Properties Inc (NYSE:IIPR), Neptune Wellness Solutions Inc (NASDAQ:NEPT), and Aurora Cannabis Inc (NYSE:ACB).

Innovative Industrial Properties Inc

Innovative Industrial Properties Inc is becoming increasingly popular with hedge funds. And for good reason; the company is the landlord to some of the biggest names in the weed business.

Innovative Industrial Properties buys land from licensed medical cannabis players and leases it back to them. This provides IIPR with an expanding portfolio and it gives cannabis companies an injection of cash.

Just recently, Innovative Industrial Properties acquired a 150,000-square-foot industrial property in Holyoke, Massachusetts from Trulieve Cannabis Corp (OTCMKTS:TCNNF, CNSX:TRUL).

The company currently owns 26 properties located in the weed-friendly states Arizona, California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Nevada, Ohio, and Pennsylvania.

The company’s 26 properties total roughly 2.0 million square feet of rentable space. The properties are 100% leased, with a remaining lease term of around 15.6 years.

This inflation-busting business annually increases its rents by three percent to 4.5%.

In mid-July, IIPR stock hit a new 52-week high of $139.53, for a year-to-date gain of 213%. The stock has given up short-term ground to profit-taking, but is still trading up 138% year-to-date.

Hedge Funds and IIPR Stock

One of the several institutional investors that has faith in Innovative Industrial Properties’ long-term prospects is Blackrock Inc. It is the company’s biggest institutional investor, at $112.9 million, or 14.1% of all outstanding IIPR shares.

Second in the list of the top IIPR institutional holders is The Vanguard Group, Inc. It has a $82.7-million position in IIRP stock, or 10.3% of all outstanding shares.

After Vanguard is State Street Corporation. Its position in Innovative Industrial Properties stock is $20.2 million; this represents 2.5% of all outstanding IIPR shares.

Neptune Wellness Solutions Inc

Neptune Wellness is another great cannabis stock that hedge funds have been cozying up to. That’s not a total surprise when you see the kind of moves that NEPT stock has been making in 2019.

Neptune Wellness Solutions is the company that marijuana firms look to in order to turn their cannabis into usable products. Neptune operates the largest cannabis extraction facility in Canada.

The company only began commercial production in the fourth quarter of 2018 and it began shipping cannabis extracts from its facility in Quebec in March.

In June, Neptune announced that fourth-quarter revenue came in at just $5.7 million. It’s not a large sum by anyone’s standards, but it’s the company’s future that has hedge funds excited. Neptune recorded its first cannabis revenue during the last few weeks of the fourth quarter.

2019 is going to be a transformational year for Neptune, with revenue from extraction and packaging to increase significantly starting in the second quarter of fiscal 2020 (ended September 30, 2019).

To that end, annual production is expected to hit more than 440,900 pounds in July 2019, all of which is fully contracted for fiscal 2020 and 2021. The company’s current extraction expansion, which should be completed by the end of calendar-year 2019, will increase Neptune’s total extraction capability to an eye-watering 13.2 million pounds.

Neptune is also expanding its extraction operations in the United States. On July 24, it closed on the acquisition of SugarLeaf Labs LLC, a North Carolina-based cannabis oil extractor.

This is the company’s second U.S.-based facility and makes Neptune the only cannabis extractor under coverage with a physical presence in the U.S. cannabidiol (CBD) market.

Neptune has also signed multi-year extraction agreements with Tilray Inc (NASDAQ:TLRY) and and Green Organic Dutchman Holdings Ltd (OTCMKTS:TGODF, TSE:TGOD).

Unlike the broader cannabis industry, Neptune Wellness Solutions stock has been on a great upward trajectory for much of the year. On July 22, it hit a new 52-week high of $6.57, for a year-to-date gain of 160%. NEPT stock is up 128% since the start of 2019.

Hedge Funds and NEPT Stock

Neptune Wellness is a small cannabis company with a market cap of just $529.5 million, so there aren’t going to be a lot of big hedge funds jumping in just yet.

Perceptive Advisors LLC is a New York City hedge fund that’s focused on biotech companies. It has a position in Neptune stock totaling $28.3 million, or 9.6% of all outstanding shares. That’s the biggest institutional stake in Neptune.

Second in the list is Bank of America Corp (NYSE:BAC), with a $2.3-million stake in NEPT stock, or 0.79% of the outstanding shares.

Third is Oz Management, another New York City-based hedge fund. Oz has $719,983 worth of Neptune shares, or 0.24% of its shares.

Aurora Cannabis Inc

Aurora Cannabis Inc is the biggest of the three marijuana stocks I’m discussing today, with a market cap of $6.2 billion. It is also one of the most popular marijuana stocks on the market.

Operating in the tiny town of Cremona, Alberta, Aurora is one of the largest and fastest-growing cannabis companies on the planet, with funded capacity in excess of 1.4 million pounds annually, and sales and operations in 25 countries on five continents.

Thanks to its aggressive acquisition strategy, Aurora has 17 wholly owned subsidiaries, including MedReleaf Corp.Aurora Deutschland GmbHCanniMed Ltd.MED ColombiaAgroproICC Labs Inc.Whistler Medical Marijuana Corporation, and Chemi Pharmaceutical Inc.

Aurora Cannabis stock has, like most weed stocks, taken a hit since the market-wide sell-off in May (which has ended for most stocks but has unfortunately continued for pot stocks). ACB stock is up 28% year-to-date, but is down 40% from its March highs.

Hedge Funds and ACB Stock

Aurora stock has taken a beating over the last number of months, which has sent investors running for the exits—with quite a few hedge funds being more than happy to hold the doors open.

The Vanguard Group, Inc. has the biggest stake in Aurora, at $193.1 million, or 2.1% of the outstanding shares.

In second place is Morgan Stanley (NYSE:MS), with a $107.0-million stake in ACB stock, or 1.2% of its shares.

Third is AQR Capital Management, LLC, with an investment in Aurora worth $64.3 million, or 0.7% of the outstanding shares.

Analyst Take

Hedge funds are known for being relatively conservative—at least if you read the “About Us” sections of their web sites; they all say they want to maximize gains and mitigate losses.

There are no guarantees with investing, but more and more hedge funds are taking positions in cannabis stocks because they understand the long-term potential.

That doesn’t mean individual investors should necessarily follow their lead, but it does suggest that they should continue to follow their favorite cannabis stocks closely and pay attention to what the so-called smart money on Wall Street is doing.

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