Marijuana stocks have given cannabis investors nothing but false starts over the past few years. Most recently, there were a plethora of issues facing the industry throughout 2022, including inflation, overproduction, lack of capital, job losses and cratering stock prices.
But investors that hold the industry's best stocks to buy and the top exchange-traded funds (ETFs) – and perhaps a bit more patience – should be best-positioned for marijuana's eventual renaissance.
The Prime Alternative Harvest Index, which tracks the performance of some of the cannabis industry's most prominent companies, delivered a fifth consecutive calendar year with double-digit negative returns.
Amazingly, while marijuana stocks haven't delivered the long-term returns investors have yearned for in recent years, the cannabis industry in the U.S. is relatively healthy – and that's despite a continued delay in federal legalization.
You can thank a growing number of forward-thinking states, such as Maryland and Missouri, which legalized recreational-use marijuana in November on election day.
Estimates from MJBizDaily put U.S. legal cannabis sales at $33.6 billion in 2023 – up 12% from 2021 – and at almost $57 billion by 2027. The economic impact is expected to be even more significant.
"While federal legalization flounders in Washington, D.C., the American cannabis industry's economic impact could near $100 billion by the end of 2022 and nearly $158 billion by 2026," Jenel Stelton-Holtmeier, editor of MJBiz Factbook, told Fortune. "This means that for every $1 consumers and patients spend at adult-use stores and dispensaries, an additional $1.80 will be injected into the economy, much of it on a local level."
The long-term prognosis for the cannabis industry is good. Ultimately, the following nine picks look like the best marijuana stocks (and funds) to benefit from this ongoing growth and maturation.
Data is as of April 19. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Innovative Industrial Properties
- Market value: $1.9 billion
- Dividend yield: 10.4%
Innovative Industrial Properties (IIPR, $69.89) is a real estate investment trust (REIT) that invests in greenhouses and industrial facilities for the medical cannabis industry. It was founded in 2016 when it had just one property under its umbrella. This grew to 66 by the end of 2020, and IIPR's portfolio is now at 110 properties.
The REIT's diversified portfolio spans 19 states. Nine, including Illinois, California and Pennsylvania, account for almost 90% of its 8.7 million square feet of rentable space.
In 2022, the REIT stock made nine acquisitions in seven states for $394 million. At the end of September, it owned 111 properties. However, it sold a Pennsylvania property in November for $23.5 million, or $461 a square foot. Based on this price received, its 110 properties owned at the end of December have a theoretical value of $4.0 billion, 60% higher than its current market cap.
When the REIT unveiled its fourth-quarter results in January, it threw a wrench into the proceedings by reporting that three properties were in default on their rent: one each in Pennsylvania, Michigan and California. The three properties represent 6.3% of committed capital.
For all of 2022, the REIT collected 97% of its rent. In the final quarter, that fell to 94%. In January, this was down to 92%. Investors can assume that the properties account for approximately 8% of its overall rent.
That's not something you want to see, but it's part of owning real estate. As a result of the defaults, IIPR stock is down more than 20% since mid-January.
Still, IIPR remains one the best REITs on Wall Street, as well as one of the best marijuana stocks, according to analysts. Piper Sandler analyst Alexander Goldfarb has an Overweight rating (the equivalent of Buy) on IIPR, with a $120 target price, some 72% higher than current levels.
"Given the company is seeing some of its best investment yields, as competitor capital availability has shrunk, we believe IIPR is well positioned to capitalize," Goldfarb says. "Further, its tenacious enforcement of its landlord rights on non-paying tenants means the rent must be paid."
- Market value: $4.1 billion
- Dividend yield: 3.5%
Scotts Miracle-Gro (SMG, $73.64) stock has been on a roller-coaster ride for the past four years. At the end of 2018, it traded south of $60, but by April 2021, it had reached an all-time high of $250, a cumulative total return of nearly 320%.
Some of the gains were attributable to its Hawthorne Gardening division, which provides nutrients, lighting, and other materials used by indoor and hydroponic growers, including the cannabis industry.
In Q1 2021, the company had record first-quarter revenue of $749 million, with Hawthorne's sales up 71% year-over-year to $309.4 million. Fast forward to SMG's fiscal first-quarter results reported on Feb. 1. Hawthorne's revenues for the three-month period were just $131.5 million, 57% lower than what was reported two years earlier.
Most of the decline in SMG's share price from its April 2021 all-time high can be attributed to the relative collapse of its Hawthorne business. Scotts' U.S. consumer business delivered an 8% year-over-year increase in sales. While they're down from the surge in sales caused by the pandemic, they're still significantly higher than pre-pandemic. Overall, Scotts' business is in good shape.
CEO Jim Hagedorn is optimistic about the cannabis industry.
"One final point on the cannabis industry. When it does recover, and it will, growers will be ready to invest in capex. We will be there to support the turnaround," Hagedorn stated in the Q1 2023 conference call. "Consolidation is happening in the industry, and we see opportunities for high-value, no-cash partnerships to further strengthen Hawthorne's ability to provide value-added and innovative solutions to growers."
That's on the commercial side.
On the consumer side of cannabis, it has a $150 million six-year convertible note in RIV Capital (CNPOF), which represents a 42% stake. In March 2022, RIV Capital acquired Etain Health, one of New York state's original medical marijuana producers, for $247 million. Etain has one of 10 vertically integrated licenses from the state.
"From a regulatory perspective, New York has tripped over itself in developing and implementing rules which has prevented the market from reaching its near-term potential," Hagedorn said in the company's conference call. "But let me make this clear. New York will become a monster market, and we'll see it through. There is progress and value in our investment with RIV."
SMG is one of the best marijuana stocks for valuation too. Shares are trading at 1.07 times sales, which is considerably cheaper than its five-year average multiple of 1.79.
- Market value: $42.0 billion
- Dividend yield: 1.6%
Constellation Brands (STZ, $227.87), like several other large-cap stocks, is an indirect way to invest in marijuana stocks.
The beer, wine and spirits purveyor invested in Canopy Growth (CGC) in 2017, buying a 9.9% stake for $191 million. In 2018, it upped that stake to 36.6% by plunking another $3.9 billion into the Canadian cannabis producer for 104.5 million shares plus warrants to acquire an additional 139.7 million shares in the future.
Then, in May 2020, it exercised the warrants it received in 2017 to buy another 18.9 million shares for $173.9 million, bringing its stake in Canopy Growth to 38.6%.
On Oct. 25, 2022, Canopy announced that it would consolidate all of its U.S. cannabis assets into Canopy USA, a separately managed holding company with an exchangeable share structure. This will allow Canopy to move ahead with its three U.S. acquisitions – Acreage Holdings (ACRDF), Wana Brands, and Jetty – instead of waiting for the federal government to legalize marijuana.
Canopy USA will have four board members, with two nominated by Canopy. The company will only hold non-voting and non-participating exchangeable shares of Canopy USA.
Constellation supports the transaction, which will see its 171.5 million common shares (35.7% ownership) in CGC converted into non-voting and non-participating exchangeable shares. More importantly, it will surrender the 139.7 million warrants it has expiring later this year and in 2026.
"We believe that the conversion of our ownership interest will maintain Constellation's ability to realize the potential upside of our investment in Canopy," said Bill Newlands, Constellation's president and CEO.
Equally important: The company completed the elimination of its dual-class share structure on Nov. 10, by paying $64.64 a share for all of the outstanding Class B shares. The $1.5 billion payment means only Class A common shares exist, making it more attractive to institutional investors.
As long as Constellation continues to profit from its three existing revenue streams, shareholders still have a chance of eventually being nicely surprised by the company's stake in CGC.
- Market value: $444.0 million
- Dividend yield: N/A
Cresco Labs (CRLBF, $1.48) is a multi-state operator (MSO) with operations in 10 states, sporting 64 retail licenses, 21 production facilities and 64 operational dispensaries. Its national brands include Cresco, Reserve, Remedi and Mindy's (edibles). On a wholesale basis, its 350 products and more than 5,000 stock-keeping units (SKUs) are sold in more than 1,000 dispensaries across the U.S.
Like many of the larger marijuana stocks, Cresco is expanding its business through both organic and acquisitive growth.
In March 2022, the company announced that it would acquire U.S. and European cannabis cultivator Columbia Care (CCHWF) in an all-stock transaction worth $2.0 billion. Shareholders will receive 0.5579 Cresco shares for every share held in Columbia. The transaction is expected to be completed by the end of the second quarter of 2023.
Once Columbia Care is in the fold, Cresco will be the largest MSO, with over $1.4 billion in pro forma revenue from more than 130 retail locations in 18 markets, giving it access to more than 180 million adults in the U.S.
As part of the regulatory approval process, Cresco said in November that it would sell assets in New York, Illinois, and Massachusetts, to Sean "Diddy" Combs for $185 million. The deal creates the largest black-owned cannabis company in the world.
In the third quarter, CRLBF saw a 2% year-over-year decline in revenues to $210 million. Adjusted EBITDA was $41 million, down both sequentially and year-over-year. Its retail revenue increased 11% year-over-year to $118 million, with average sales per store of $2.35 million.
Cresco is one of Wall Street's favorite marijuana stocks. Of the 15 analysts following the stock, nine give it a Strong Buy and six have it at Hold. Plus, the average target price of $5.00 implies the stock will more than triple over the next 12 months or so.
- Market value: $1.7 billion
- Dividend yield: N/A
If you're looking for a pure-play cannabis company in the U.S., Massachusetts-based Curaleaf Holdings (CURLF, $2.44) is one way to go. The firm got its start in New Jersey in 2010, developing one of the first vaporizers to administer a single measured medical marijuana dose.
CURLF operates in 19 states, including New York, New Jersey, Arizona, Florida, Illinois and Massachusetts. It owns and operates 150 dispensaries and 28 cultivation sites. And Curaleaf is becoming one of the world's leading cannabis companies by using science to enhance the customer experience.
A total of 39 states, as well as Washington, D.C., have legalized medical marijuana. Twenty-one states and D.C. have legalized adult-use cannabis. As more states legalize recreational weed, Curaleaf should be able to continue to grow its business organically and through acquisitions.
However, as investors in even the best marijuana stocks are aware, the industry's maturation process continues to be a long and winding road. That's true even for Curaleaf.
On Jan. 26, the company announced that it had cut 10% of its payroll. It expects the reduction in its headcount, combined with other actions taken, will save $60 million in annual expenses, 50% higher than its initial target. As part of its announcement, CURLF also said that it's closing its production and cultivation facilities in Oregon, California and Colorado so that it can focus on its strongest markets.
"We believe these states will represent opportunities in the future, but the current price compression caused by a lack of meaningful enforcement of the illicit market prevents us from generating an acceptable return on our investments," CEO Matt Darin stated in Curaleaf's press release.
Curaleaf finished the third quarter with $339.7 million in sales, which filtered down to adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $84 million – year-over-year increases of 7% and 18%, respectively.
Be careful with CURLF, however. Like many marijuana stocks, Curaleaf is traded over the counter, sometimes at very thin volumes. That means limit orders and stop-losses are a must when investing.
- Market value: $1.5 billion
- Dividend yield: N/A
Since Tilray Brands' (TLRY, $2.41) merger with Aphria in May 2021, the cannabis industry has faced incredible headwinds, including the U.S. government dragging its heels on legalizing cannabis at the federal level.
The uncertainty has knocked down Tilray's share price by roughly 86%.
This has forced CEO Irwin Simon to develop a plan to make Tilray competitive no matter the regulatory environment for cannabis in the U.S. As a result, the company pivoted to beer and premium spirits to fill the gap in revenues and profits, and in December 2021, Tilray acquired Breckenridge Distillery for $103 million.
More recently, Tilray acquired Montauk Brewing for $35 million in cash and stock. Idyllically located at the tip of Long Island, Montauk is, according to Tilray's announcement, the fastest-growing craft beer brand and number-one craft brewer in New York City. It distributes its beer to more than 6,400 locations in the U.S.
To further grow its beer business, the company hired Ty H. Gilmore to run its U.S. beer business. Gilmore was most recently the executive vice president of Glazer's Beer and Beverage. Before that, he spent many years at Diageo (DEO) in sales-related positions.
A year ago, Tilray's beverage alcohol revenue in its fiscal third quarter, which ended Feb. 28, 2022, accounted for 13% of its overall revenue. In Q3 2023, it was $20.6 million, or 14.1% of the $145.6 million in net revenue in the quarter. Its wellness business, Manitoba Harvest, accounted for 8% of overall revenue.
While Simon continues to pull different levers to add value for shareholders, Tilray remains, at the core, a cannabis business. In its fiscal Q3, cannabis accounted for 33% of its quarterly revenue.
Tilray finished the three-month period maintaining its top spot for Canadian cannabis market share. It continues to diversify its revenue streams in the U.S. to expand its presence south of the border while staying prepared for the day U.S. legalization happens.
It'll take a while, so investors in one of Wall Street's best marijuana stocks can expect more non-cannabis acquisitions in 2023.
British American Tobacco
- Market value: $81.7 billion
- Dividend yield: 7.9%
British American Tobacco (BTI, $36.53) announced on Jan. 31 that it would reduce its number of operating regions to three from four, while also lowering its number of business units from 16 to 12. The three regions will be the U.S. (Reynolds American), Americas & Europe (AME), and Asia Pacific, Middle East & Africa (APMEA).
To accelerate its transformation from a combustibles-based business to non-combustibles, BTI has appointed its European regional director, Johan Vandermeulen, to the newly created role of chief transformation officer.
"The Chief Transformation Officer will be responsible for driving faster transformation, accelerating greater capability build in key areas and enabling an even faster, simpler and more agile organization," the company stated in its press release.
An important part of the cigarette company's transformation is to generate 5.0 billion British pounds ($6.1 billion) in revenue from its New Categories segment (Vuse, glo, and Velo reduced-risk products) by 2025. While not profitable currently, it plans to be in the next three years.
To give you an idea of how important these reduced-risk products are to the company, one needs to look at British Tobacco's 2022 financial results.
New Categories revenue increased by 40.9% over 2021, with approximately 22.5 million adults using its non-combustible products, while combustibles revenue increased 4.6%. However, it's important to note that New Categories revenue accounted for just 10% of British American Tobacco's total 2022 revenue.
In December, Argus Research reiterated its Buy rating on the company's stock with a $45 target price. It currently trades at 7.4 times forward earnings estimate. That's below its five-year average of 9.0. Argus likes the attractive dividend yield – one of the highest of all the marijuana stocks featured here.
The firm's most interesting point in its research report is British Tobacco's push into e-commerce.
"The company is strengthening its e-commerce business, with strong growth in subscribers. Subscriptions provide higher margins than traditional retail sales, and are an important part of the company's growth strategy," Argus's research report stated.
Not forgetting that this is an article about the best marijuana stocks, British American Tobacco invested an additional $5.1 million last March in Canadian cannabis producer OrganiGram Holdings (OGI), bringing its stake in the company to 19.5%. The two continue to collaborate on new cannabis-related products.
AdvisorShares Pure US Cannabis ETF
- Assets under management: $321.2 million
- Expenses: 0.80%, or $80 annually on a $10,000 investment
The AdvisorShares Pure US Cannabis ETF (MSOS, $5.44) launched in September 2020. This fund stands out because of its U.S.-specific focus; it holds several multistate operators, such as Curaleaf and Cresco, the ETF's second- and sixth-largest holdings with 17.0% and 7.7% weightings, respectively.
The portfolio is managed by Dan Ahrens, who also happens to be AdvisorShares' chief operating officer. In addition to MSOS, Ahrens manages six other ETFs for AdvisorShares, including its most recent addition, the AdvisorShares MSOS 2x Daily ETF (MSOX), a fund designed to deliver twice the daily performance of the AdvisorShares Pure US Cannabis ETF.
As pure-play, actively managed ETFs go, MSOS breaks the mold.
"U.S. MSOs possess an unusual set of attributes for such an early-stage industry in that they have among the highest growth rates of any sector, are generating substantial increases in EBITDA dollars, but have balance sheets capable of sustaining capex and funding M&A that we expect to fuel growth for the next few years," said Needham analysts Matt McGinley and Chad Britnell.
Kiplinger contributor Matt Hawkins discussed the pros and cons of investing in multi-state operators in September 2021. The biggest positive, in his view, is the fact they're building brand loyalty in the states where they operate while biding their time when they can go nationwide.
It's been a rough road for the ETF, which is down almost 70% over the past year. However, if you're an aggressive investor, believe federal legalization will happen in the future and have a bit of a value bent, you absolutely ought to be looking at MSOS.
Global X Cannabis ETF
- Assets under management: $36.2 million
- Expenses: 0.51%
Compared to the ETFMG Alternative Harvest ETF (MJ), which dates back to December 2015, the Global X Cannabis ETF (POTX, $8.35) is a relative newcomer to cannabis funds. That's reflected in its small asset base of $36 million, approximately one-seventh the size of MJ.
However, what it lacks in asset size, it makes up for with Canada's best marijuana stocks.
The ETF tracks the performance of the Solactive Cannabis Index, a collection of companies that generate at least 50% of their revenue, operating income or assets from cannabis. Approximately 60% of the ETF's holdings are Canadian companies.
By comparison, the MJ ETF follows the performance of the Prime Alternative Harvest Index, which in addition to tracking cannabis stocks, also includes a 51.5% weighting in the ETFMG U.S. Alternative Harvest ETF (MJUS). As a result of the ETF weighting, the Canadian content in MJ is slightly less than 42%.
When you consider the performance of POTX compared to MJ – the former is down almost 70% over the past year, while the latter is off by about 63% – you see that Canadian cannabis companies continue to be hammered more than their U.S. counterparts.
A big headwind facing Canadian cannabis companies like Tilray and Canopy Growth is that they haven't been able to move on U.S. expansion until the federal government legalizes cannabis.
Canopy's move to consolidate its potential U.S. assets sooner rather than later under Canopy USA (described in the Constellation section above) is a test case for other Canadian cannabis producers.
Of the two cannabis ETFs featured in this article, POTX is the contrarian play.
Will has written professionally for investment and finance publications in both the U.S. and Canada since 2004. A native of Toronto, Canada, his sole objective is to help people become better and more informed investors. Fascinated by how companies make money, he's a keen student of business history. Married and now living in Halifax, Nova Scotia, he's also got an interest in equity and debt crowdfunding.
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