10 Best Marijuana Stocks to Buy for 2021
Will marijuana stocks finally come to life in 2021? If so, these 10 picks could be some of the best investing options as we head into the new year.
Investors keep waiting for marijuana stocks to come to life.
In 2020, the Prime Alternative Harvest Index, which covers many of the major global cannabis companies, hasn't been good. It's off by more than 37% through the end of October, so it's likely that a fuller rebound of cannabis stocks will have to wait until 2021.
Marijuana investors are used to waiting. The index got its start on Dec. 18, 2017, and except for some excitement in September 2018 and spring 2019, it has mostly failed to deliver for investors.
But could 2021 be the year?
That depends on what happens in Washington. If the federal government takes steps for broader reform beyond legalizing cannabis, including passing the SAFE Banking Act, money may rotate back into marijuana stocks. The SAFE Banking Act would allow state-legal cannabis businesses to work with financial institutions – a move that would help small businesses.
"Cannabis businesses have been deemed essential during this pandemic," Justin Strekal, political director of the National Organization for the Reform of Marijuana Laws (NORML), said in a statement. "Unfortunately, at the federal level, prohibition compounds the problems that this emerging industry faces. Small cannabis businesses in particular are facing tough economic times and access to traditional financial tools will help ensure that they can weather this pandemic."
Other catalysts could help, too. For instance, if the federal government removed marijuana from its list of Schedule 1 drugs, or if it eliminated Section 280E of the IRS tax code, U.S.-based cannabis stocks could generate significantly higher profits and cash flow.
Here, we'll look at 10 of the best marijuana stocks, funds and other investments for 2021 if the environment tilts in its favor.
Data is as of Oct. 31.
- Market value: $2.8 billion
Most of the best marijuana stocks in this article lean slightly to the recreational side of cannabis, rather than its medicinal benefits. But the sole purpose of GW Pharmaceuticals (GWPH, $90.01), since its founding over 20 years ago, is to develop and commercialize plant-derived cannabinoid therapeutics.
Its lead product is Epidiolex, which uses cannabidiol (CBD) to treat seizures associated with Lennox-Gastaut syndrome and Dravet syndrome. These seizures happen in early childhood; Epidiolex is used to treat patients as young as two years of age. It was approved by the U.S. in November 2018, and the European Union approved it in September 2019 under the brand name Epidyolex.
Since the Food and Drug Administration approved Epidiolex – the first plant-derived cannabinoid medicine to be approved by the FDA – GWPH has lost roughly a third of its value. That's despite the company's revenues growing from a little more than $10 million in 2017 to $442 million in the trailing 12 months ended June 30, 2020.
The company still is losing money, but those losses are shrinking – it had $9 million in red ink during the most recent quarter, versus $29.3 million in the year-ago period. Meanwhile, GW Pharma's pipeline is full of promising plant-based CBD treatments.
On Aug. 3, the FDA approved Epidiolex's oral solution to treat TBS (Tuberous Sclerosis Complex) seizures. Almost two-thirds of TBS patients become resistant to treatment. Epidiolex provides physicians with a new tool to fight these seizures. Other treatments for multiple sclerosis and schizophrenia are also in the pipeline providing a long-term pathway to profitability.
- Market value: $1.3 billion
Aphria (APHA, $4.50) is overlooked compared to some of the other Canadian cannabis stocks. That's a shame, as it's one of the industry's better-run companies.
Aphria managed to deliver a net loss of C$5.1 million during the first quarter of its fiscal 2021, which was almost 50% better than the consensus analyst estimate. Revenues of C$145.7 million was up 15.5% year-over-year.
Most importantly, the company's all-in cost of goods sold per gram of cannabis was C$1.41, which was 16.6% lower than in Q1 2020.
"Our strong first quarter results reflect the continued robust growth and development of Aphria's adult-use cannabis brands in Canada," chief executive officer Irwin Simon said in the Oct. 15 earnings release.
CFO Carl Merton was much more boastful during the conference call, stating, "Our financial results continue to be the envy of the industry."
Despite the solid results, investors pushed its shares down by more than 15% on the news. Year-to-date, APHA stock is down 14% – much worse than its industry peers, who are roughly breakeven in the same period.
Investors should ignore the noise.
"(Aphria is) the clear market share leader nationally (in Canada), and in key provinces such as Ontario, where retail sales growth should outpace the rest of the country due to under penetration of (cannabis) stores," CIBC analyst John Zamparo wrote in an Oct. 8 note to clients.
He's part of an extremely enthusiastic group of analysts. Of the 13 pros covering Aphria, 11 call it a Strong Buy, one calls it a Buy and just one calls it a Hold, with no Sells or Strong Sells among them. In the eyes of Wall Street's experts, APHA is one of the best marijuana stocks for 2021.
Innovative Industrial Properties
- Market value: $2.5 billion
About two years ago, Kiplinger contributor Harriet Lefton discussed four cannabis firms. One of the stocks was Innovative Industrial Properties (IIPR, $116.63), a rarity among marijuana stocks in that it's a real estate investment trust (REIT). Specifically, IIPR invests in greenhouses and industrial facilities for the medical cannabis industry.
Remember: The U.S. cannabis industry is still relatively young compared to other, more mature businesses such as the liquor or tobacco industries. Two years ago, the industry was even less mature. The risks of investing in real estate for cannabis producers, albeit of the medical variety, was still not a slam dunk.
However, since that Nov. 16, 2018, article, IIPR has delivered a total return of nearly 150%. By comparison, well-known cannabis pick Canopy Growth (CGC) has lost nearly half of its value in that time.
Currently, this REIT remains an excellent play on the growing cannabis trade in this country. In 2018, IIPR owned nine properties that it leased to medical cannabis producers. Today, that's up to 58 properties, with 4.4 million rentable square feet, boasting an occupancy rate of 99.2%. IIPR swelled by 11 properties during the first six months of fiscal 2020, spending $138.7 million for almost 1.4 million square feet in triple-net leases (the tenant pays for insurance, maintenance and taxes, making the REIT's profits more consistent and predictable).
IIPR is a popular stock among analysts, garnering three Strong Buys and three Buys versus just one Hold and no Sell calls of any sort. And an average price target of $141.57 gives it another 21% of potential upside. That doesn't include returns from its nearly 4%-yielding dividend.
- Market value: $8.4 billion
Most people know Scotts Miracle-Gro (SMG, $150.05) for its lawn care and gardening products. As well they should. SMG is America's largest such provider of said products.
Interestingly, Scotts has become something of a COVID-19 play, as more people with green thumbs stayed home to work on their careers and gardens. SMG shares are up 47% year-to-date. The company's third-quarter results, released in late July, helped spur that gain. Scotts reported a 21% increase in its core consumer lawn and garden division (72% of sales), and a 72% increase in its Hawthorne Gardening division (20% of sales), which is the largest distributor of hydroponic products in North America.
These products are vital to growers of all kinds, but especially to those looking to grow cannabis.
Scotts acquired Sunlight Supply, the largest distributor of hydroponics in the U.S., for $450 million in June 2018. Together with Hawthorne's 2017 sales of $290 million, the combined business had $600 million in annualized 2017 sales and more than 1,800 hydroponic retail stores in North America.
It was a game-changing acquisition. Hawthorne reported sales of $731.7 million during the first nine months of 2020, a 59% jump from a year earlier. Hawthorne should report sales greater than $1 billion for the year based on a similar increase in the fourth quarter.
With the ongoing demand for hydroponics by at-home and professional cannabis growers, Hawthorne's sales will continue to flourish. And that's what puts SMG among 2021's best marijuana stocks.
- Market value: $67.1 billion
Marlboro maker Altria (MO, $36.08) has not had a good stretch over the past few years. The stock has delivered a 3.6% total loss (so, including Altria's hefty dividend, which currently yields a whopping 9.5%) since this point five years ago.
There are risks with investing in the cigarette manufacturer. It inherited many problems when it chose to acquire a 35% stake in e-cigarette company Juul Labs in late 2018 for $12.8 billion. It was forced to take a $4.5 billion writedown in October 2019 and another $4.1 billion write-down a few months later in January 2020.
Now the e-cig business is fighting off hundreds of lawsuits, suggesting it targets teenagers in its advertising and marketing.
Bloomberg reported that U.S. District Judge William Orrick ruled in Juul's favor at the end of October. The judge ruled that the plaintiffs could not prove that Juul broke the rules under the Racketeer Influenced and Corrupt Practices Act (RICO). If the plaintiffs were successful, Altria would have had to pay triple the amount of damages awarded by a court. Thus, the judgment took some legal pressure off Juul and Altria.
So what's the cannabis connection?
Altria owns 45% of Cronos Group (CRON), one of the largest Canadian marijuana stocks. It also has warrants to take control of Cronos and holds more than half the board seats. With CRON off more than 30% this year, and the company worth about $2 billion, Altria could use a small portion of its $7.8 billion in 12-month free cash flow to buy $100% control.
Expect that to have a higher likelihood of happening if Joe Biden wins the 2020 elections. He and vice presidential candidate Kamala Harris have pledged to support the decriminalization of cannabis at the federal level.
- Market value: $32.0 billion
In the same way you can indirectly invest in cannabis by buying Altria shares, you can do the same by investing in Constellation Brands (STZ, $165.23), the purveyor of numerous beer, wine and spirits brands.
That's because the company invested in the aforementioned Canopy Growth in 2017, buying a 9.9% stake for $191 million. It upped that stake to 38% in 2018 by investing $4 billion in the Canadian cannabis producer. It continues to hold warrants that, if exercised, would give it 55.8% ownership in the company.
By aligning itself with Canopy, it provides itself with a fourth revenue stream that will grow exponentially with federal legalization.
As mentioned before, Canopy Growth shares have struggled since peaking in late 2018. However, the losses it has suffered from Canopy's weakened performance have slowed in recent months as CGC's share price rebounded. During the second quarter, Constellation lost $31 million from its Canopy investment, down significantly from its $377.6 million loss in the first quarter.
Despite flat beer sales and an 11% decrease in revenue for its wines and spirits in the second quarter, STZ still managed to increase earnings from the year-ago period by 4 cents per share, to $2.76.
The main reason to like Constellation, of course, remains its core businesses. And STZ bolstered that portfolio in September, when it acquired Kentucky-based craft brandy producer Copper & Kings for an undisclosed amount.
"As an innovative distillery regarded for its experimental attitude and highly rated craft spirits, Copper & Kings American brandy represents a significant growth opportunity for us and reinforces our continued commitment to premium spirits," Constellation CEO Bill Newlands said at the time.
As long as Constellation continues to profit from its three existing revenue streams, investors can expect to be nicely surprised at some point by the company's investment in Canopy Growth.
- Market value: $5.0 billion
If you're looking for a pure-play cannabis company in the U.S., Massachusetts-based Curaleaf Holdings (CURLF, $9.38) could be the way to go. The company got its start in New Jersey in 2010, developing one of the first vaporizers to administer a single measured medical marijuana dose. It grew from there.
Today, it operates in 23 states, and it owns and operates 95 dispensaries, 22 cultivation sites, and 30 processing sites. And Curaleaf is becoming one of the world's leading cannabis companies by using science to enhance the customer experience.
While it got its start in medical marijuana, CURLF is working to develop lifestyle brands that support adult customers' recreational use. Vertically integrated, it controls its cannabis business from start to finish. It has operations from coast-to-coast.
Thirty-seven states have legalized medical cannabis. Another 11 have legalized adult-use cannabis, with five more – Arizona, New Jersey, New York, Pennsylvania, and Connecticut – deciding whether to do so shortly.
As more states legalize adult-use, Curaleaf will continue to grow its business organically and through acquisitions. Since its IPO in September 2018, it has made 14 acquisitions.
In February, it issued 55 million subordinate voting shares ($286 million) to acquire Cura Partners, a deal that was first announced in May 2019. Cura Partners' Select brand is known for its cannabis oil. It recently expanded its U.S. presence by making Select Oil available to the 131,654 medical cardholders in Ohio. Select products are available in 14 states.
Most importantly, Curaleaf delivered five consecutive quarters of positive adjusted earnings before interest, taxes, depreciation and amortization, and is very close to profitability on a GAAP (generally accepted accounting principles) basis.
Be careful with CURLF, as it's traded over-the-counter, sometimes at very thin volumes. But it could end up being one of the best marijuana stocks of 2021.
AdvisorShares Pure US Cannabis ETF
- Assets under management: $34.9 million
- Expenses: 0.74%, or $74 annually on a $10,000 investment
One of the attractive investment features of Curaleaf is that it's entirely focused on the U.S. cannabis market.
Well, in early September, the AdvisorShares Pure US Cannabis ETF (MSOS, $25.04) launched. The actively managed ETF focuses on multi-state operators (MSOs) such as Curaleaf, which is the ETF's largest holding at a 9.3% weighting.
"As more states legalize cannabis for medical or recreational use and as this fragmented industry evolves, M.S.O.s are believed to be a growth opportunity based on their ability to develop operation, distribution, marketing, and research and development efficiencies in multiple states," AdvisorShares believes.
The portfolio is managed by Dab Ahrens, who also happens to be AdvisorShares' chief operating officer. Ahrens also manages the AdvisorShares Vice ETF (ACT), a fund dedicated to vice investments such as alcohol, tobacco and cannabis.
However, as pure-play, actively managed ETFs go, MSOS breaks the mold.
"MSOS is the first and only actively managed U.S.-listed ETF with dedicated cannabis exposure focusing exclusively on U.S. companies, including multi-state operators. The portfolio manager allocates across an investable universe of U.S. companies spanning a variety of cannabis-related businesses," AdvisorShares states.
For many investors who don't want to take on the risk associated with investing in individual stocks but like the idea of investing in smaller companies – less than 3% of the portfolio is invested in large-cap firms – this basket of about 30 marijuana stocks could be lifted by a rising tide.
ETFMG Alternative Harvest ETF
- Assets under management: $565.7 million
- Expenses: 0.75%
Anyone who invests or is interested in the cannabis industry knows the ETFMG Alternative Harvest ETF (MJ, $10.72).
Launched in December 2015, the ETF is approaching its fifth anniversary with almost $600 million in total net assets. There isn't another U.S.-listed marijuana ETF that comes close.
MJ tracks the Prime Alternative Harvest Index's performance, which targets the global cannabis industry – one that's expected to grow to $55.8 billion in annual revenue by 2025, from $11.4 billion in 2015.
Unlike MSOS, many of MJ's top 10 holdings are Canadian cannabis companies, such as the aforementioned Canopy Growth and Aphria. Top 10 holdings account for well more than half of assets, with the remaining 26 stocks accounting for the rest.
The Prime Alternative Harvest Index looks to embrace a broad strategy that not only invests in companies that grow or manufacture cannabis-related products; it also invests in those businesses that are likely to benefit from increased cannabis use worldwide. For example, a company such as Scotts Miracle-Gro will benefit from the sale of lawn care, gardening and hydroponics equipment to cannabis enthusiasts. It represents 3% of MJ's total portfolio.
While future decriminalization of cannabis at America's federal level would no doubt benefit its U.S. holdings, MJ's Canadian investments would benefit significantly, too. Canopy Growth, for instance, has the option to buy Acreage Holdings (ACRHF) should cannabis be legalized at the federal level.
The only downside of MJ is that its expense ratio is 0.75%. While that's just one basis point (a basis point is one one-hundredth of a percentage point) higher than MSOS, remember: MSOS is actively managed. This is an above-average price for a passive ETF, albeit one in a growth industry.
Merida Merger Corp I
- Market value: $159.6 million
It wouldn't be 2020 if one of the 10 best marijuana stocks on this list weren't a special-purpose acquisition company (SPAC). It is, after all, the year of the SPAC – one in which a record number of "blank-check companies" have gone public.
However, Merida Merger Corp I (MCMJ, $9.75) didn't go public in 2020. Its initial public offering (IPO) happened on Nov. 4, 2019, when it tried to raise $120 million by selling 12 million units to investors. The management team behind this SPAC, which is coming up on its first anniversary (it has 24 months to complete a combination), as a considerable amount of experience in the cannabis industry.
"Merida Capital Partners III LP, our sponsor, and its affiliated funds, which we collectively refer to as 'Merida,' have worked diligently over the past 10 years to identify and complete transactions within the legal cannabis industry," according to the SPAC's IPO prospectus.
"Merida targets specific investments in the emerging cannabis industry as well as products and services associated with the evolution of cannabis as an agricultural product, a natural plant-based medicine, a constituent in pharmaceutical formulations, and an adult-use consumer product."
One of Merida Capital Partners' current holdings is GrowGeneration (GRWG), a specialty retailer of hydroponics and other gardening needs. In April 2017, it invested $1.65 million in the company to help the retailer expand its operations on the West Coast. As part of the investment, Merida got additional warrants to buy shares for $2.75 each in the future.
As of the end of June, Merida owned 4.86 million shares of GrowGeneration, worth approximately $81 million at current prices.
If anyone can find a good cannabis acquisition, it ought to be Merida.