Marijuana presents a unique opportunity as it is an emerging industry with a lot of growth to come. The question for investors, however, is which marijuana stocks are the best to buy and hold for the long term.
Pot investors should look for stocks with strong earnings growth records that are likely to take off as more states legalize cannabis. And keep an eye on all the steps the federal government has taken towards full legalization. Three stocks of marijuana that match the bill are Curaleaf (OTC: CURLF), Trulieve Cannabis (OTC: TCNNF) and Innovative industrial properties (NYSE: IIPR).
Curaleaf makes the most of its size
At last count, Curaleaf operates 109 dispensaries in 23 states. The title is down more than 9% over the year despite a constant improvement in turnover.
The company has increased its revenue every year since its inception in 2010 and continued this trend in the second quarter. It reported quarterly revenue of $ 312 million, up 166% year-over-year and 20% sequentially, beating other multi-state marijuana operators. Curaleaf is not yet profitable, losing $ 9.7 million in the second quarter, compared to a net loss of $ 17.2 million in the same quarter in 2020 and a net loss of $ 1.8 million in the first quarter of 2021. However, it is heading towards profitability by recording its ninth consecutive quarter of positive Adjusted EBITDA, reaching a record $ 84 million, up 201% from Q2 2020 and 35% sequentially.
The company is number one in market share in New York, Vermont and North Dakota, and number two in Florida, Oregon and Arizona. It is the only multi-state operator with a strong presence in Europe, thanks to its purchase in April of EMMAC Life Sciences Limited for $ 50 million and 17.5 million Curaleaf shares. The company has renamed EMMAC to Curaleaf International and operates in UK, Germany, Italy, Spain and Portugal.
Trulieve’s temporary problems provide an entry point
Florida-based multi-state operator Trulieve was on a winning streak until advertising problems began to cloud the company. JT Burnette, the husband of Trulieve CEO Kim Rivers, was convicted last month on several corruption charges, including extortion and fraud. The stock has fallen more than 23% this year and more than 33% in the past three months. While this news has dampened investor enthusiasm for Trulieve, it has little impact on the company’s growth possibilities.
Trulieve has just opened its 100th dispensary and its recent purchase of Harvest Health and leisure could make it the number one cannabis company in terms of revenue. Trulieve said it will have 145 dispensaries once the Harvest Health acquisition is complete.
In the second quarter, Trulieve reported revenue of $ 215.1 million, up 11% sequentially and 78% year-over-year. One of the few cannabis companies already profitable, the company reported net profit of $ 40.9 million, up 36% sequentially and 116% from the same period in 2020, and its 14th consecutive quarter. profitability. The company said it adjusted EBITDA of $ 94.9 million, up 4% sequentially and 55% year over year.
Trulieve initially focused on becoming the dominant company in Florida. The company is now using that same methodology to make inroads in Arizona, Pennsylvania and Georgia. Trulieve offers over 700 products and has focused on marketing local brands to build consumer confidence.
The CEO’s husband’s legal struggles, although poor public relations for the company, open the door for investors to get into growth stock, with a low price-to-earnings (P / E) ratio. Many cannabis companies don’t have P / E ratios because they aren’t profitable – but Trulieve is profitable and his forward P / E is only 19.25, compared to the more typical 73.73 for Curaleaf.
Innovative industrial properties have great advantages
Innovative Industrial Properties’ stock has grown by more than 24% this year. There are several things that make Innovative a great long-term cannabis stock: relatively low risk, high dividend, and a decent size gap for a business model.
The risk is low because, unlike the other two stocks, Innovative is a real estate investment trust (REIT) that does not deal directly with marijuana, so it does not have to worry about any federal or state laws regarding the sale. of cannabis. .
It is a REIT that buys and leases properties from cannabis companies, offering immediate cash in exchange for long-term triple net leases. This model produces stable funds from operations for IIP. While it is possible for a cannabis customer to have financial difficulties and not be able to pay their rent, Innovative could easily turn around and lease the facility to another cannabis company. Ironically, the greatest risk for Innovative is the potential federal legalization of cannabis sales. This would lead to opening up more traditional funding to cannabis companies, so they might not need to sell their facilities to raise funds. However, it’s still a long way off – and even then I think fledgling cannabis companies will still try to free up money by selling their properties and entering into a long-term lease.
Innovative’s moat stems from its pioneering status as a cannabis REIT. Since its inception in 2016, the company has grown to include 74 properties in 18 states, with a total of 6.8 million rentable square feet. Small REITs, such as AFC Gamma and Power REIT, have started to occupy what is a lucrative space, but the market caps of these two companies combined are less than 10% of Innovative’s $ 5.62 billion market cap. Innovative has a great advantage in terms of experience, notoriety and funds.
In its second quarter earnings report, the company said six-month adjusted operating funds (AFFO) of $ 81.4 million, compared to $ 38.8 million for the same period in 2020. Its figure six-month business was $ 91.7 million, compared to $ 45.4 million per year. over the year.
Innovative has just raised its quarterly dividend from 32% to $ 1.40 per share, offering a return of 2.45%. Since the company started offering a dividend in 2017, it has increased its dividend by 833%. This is one of the main reasons Innovative is a good long-term investment in cannabis – these dividends combine with the growth of the company’s shares to provide a solid total return. The dividend is well hedged, with an AFFO / dividend ratio of 85%, and the company said it plans to keep it in the 75% to 85% range.
Make the best decision in the long run
Of the three stocks of marijuana, Curaleaf has the most explosive growth. Thanks to its declining stock price over the year, it presents an excellent entry point. Trulieve’s deal to buy Harvest Health will also fuel significant growth and it looks like a better deal than Curaleaf due to the bad publicity.
Innovative industrial properties present more risk than the other two long-term stocks thanks to the possibility of federal legalization of marijuana, but I still consider it to present the least danger in the short term and the most total rate of return. raised.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.