Growth stocks haven’t received the same love from investors lately as they did in the early days of the pandemic. As the bull market has revived, some stocks have responded in similar fashion, while others are still lagging the market.
Ultimately, the stock price is not the most important factor in whether or not you decide to invest in a company. While price is clearly part of the picture, you need to understand the business behind that stock, the financials, the moat, and the long-term growth story.
If you have the risk tolerance to invest in growth-oriented companies, there are plenty of great choices you can choose from. Here are two such stocks to add to your buying basket now.
1. Innovative industrial features
Innovative industrial properties (NYSE: IIPR) is something of a unicorn in the cannabis space, in that it technically doesn’t involve growing or selling the actual product. The company operates as a real estate investment trust (REIT) and uses a sale-leaseback model. It purchases regulated cannabis facilities from licensed operators across the country and then leases them back to those operators under long-term, triple net lease agreements. Innovative Industrial Properties currently has 108 properties in 19 states in its portfolio.
This REIT only operates in the medical cannabis industry, a much more broadly legalized and regulated market compared to recreational. Its structure achieves multiple goals. With the triple net lease arrangement, the cannabis operator, not the REIT, pays rent and utilities, along with other aspects of maintaining the property, such as insurance and maintenance. As of the recent quarter, Innovative’s average lease term is 14.8 years, with 95.2% of the portfolio leased.
No single tenant represents more than 17% of annualized base rent, and multi-state operators account for approximately 90% of annualized rent for the company. If you’re wondering why a cannabis operator would commit to a sale-leaseback model, the answer is simple. This is a common arrangement in the cannabis sector, mainly because it allows the operator to use more capital to run the actual business. And because cannabis use remains prohibited by federal law for medical or recreational purposes, most banks and other financial institutions are extremely reluctant to lend to cannabis operators.
In the most recent quarter, Innovative Industrial Properties generated total revenues of approximately $76 million, while net income was $39 million. These figures are slightly lower than a year ago, but investors need not worry. The company took on some expenses for property management fees it had to pay for properties it repossessed, as well as costs related to the reclassification of leases on two properties.
Adjusted funds from operations, a more accurate measure of a REIT’s profitability, came in at $63 million, down just a hair from a year ago but up 17% from two years ago. Management is being prudent in a tough business environment, and both the business and its financials look solid.
Additionally, Innovative Industrial Properties has a debt ratio of just 11%, an exceptional figure for a capital-intensive company. As a REIT, it must pay out about 90% of its profits in the form of dividends. The company has been consistently profitable, in addition to delivering remarkable revenue growth, so dividend payments have increased significantly over the years. In the past five years alone, Innovative Industrial Properties has grown its dividend by over 200%.
That yield currently stands at just under 7%, an impressive figure by any measure and about four times higher than what the average stock trades on the S&P500 pays. If you have the risk appetite to invest in cannabis stocks, this is one that pays dividends, is profitable, and generally has a rock-solid balance sheet. Its resilient revenue model drives growth even in an uncertain environment, and as legalization expands, the company’s opportunities are significant.
For investors, it may be worthwhile to buy at least a few shares.
2. Shopping
Shopify (NYSE: STORE) is trading at double-digit rates year-to-date and is nearing a 52-week low. While investors don’t seem excited about the company’s near-term growth prospects — management is forecasting year-over-year revenue growth in the high teens in the second quarter — there’s a lot to like about this company if you’re looking at it over a long-term investment horizon.
The company caused a sensation last year when it decided to sell its logistics activities. The company is still in the process of divesting this part of its business, and this is expected to impact revenue by 300 to 400 basis points in the coming quarter. Investors will therefore have to be patient during this adjustment period. Shopify certainly isn’t delivering pandemic-era growth numbers, but it wasn’t reasonable to expect that long term. You’re also looking at a much more mature company than it was four to five years ago.
In the first quarter of 2024, Shopify processed $61 billion in gross merchandise volume (GMV), up 23% from the same quarter in 2023, with gross payment volume totaling $36 billion. Revenue increased 23% year over year to just under $2 billion, of which $1.4 billion came from merchant solutions revenue and $511 million from subscription solutions revenue. Merchant solutions revenue includes sources such as payment processing fees and point-of-sales hardware, while subscription solutions are the recurring fees merchants pay to use the platform.
That merchant solutions revenue figure rose 20% year over year, while subscription solutions rose 34%. The company was free cash flow positive, bringing in $232 million in the three-month period. It ended the quarter with $5.2 billion in cash and investments, and it brought in $1.1 billion in operating cash flow over the past 12 months.
Shopify Payments has now reached 60% of the company’s GMV, meaning more and more merchants are choosing this seamless payment processing solution for their store over a third-party offering. Its checkout service, Shop Pay, processed 56% more GMV in Q1 2024 than it did in the same period last year, accounting for 39% of total GMV.
Management is also actively working on integrating artificial intelligence into its merchant offerings. For example, its AI assistant, Shopify Magic, helps merchants write, edit, and create content for email campaigns, product descriptions, and other important aspects of marketing to customers.
In this writer’s humble opinion, it seems shortsighted to assume that Shopify’s day in the sun is over. Investors who agree should consider investing in this stock sooner rather than later while it is on sale.
Should you now invest €1,000 in innovative industrial real estate?
Before buying Innovative Industrial Properties stock, you should consider the following:
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Rachel Warren has positions in Shopify. The Motley Fool has positions in and recommends Innovative Industrial Properties and Shopify. The Motley Fool has a disclosure policy.
2 Unstoppable Growth Stocks That Are Screaming Bargains in June was originally published by The Motley Fool
