Cannabis investors have been waiting for a surge in marijuana stocks since the end of 2017. So far, they have gotten nothing but false starts.
The Prime Alternative Harvest Index, which tracks the performance of some of the cannabis industry's most prominent companies, is working on its fifth consecutive calendar year with double-digit negative returns. Perhaps worse: A $10,000 investment in the index at its inception on Dec. 18, 2017, would today be worth around $2,000.
Amazingly, while marijuana stocks haven't delivered the long-term returns investors have yearned for over the past five years, the cannabis industry in the U.S. is extremely healthy – and that's despite a continued delay in federal legalization. You can thank a growing number of forward-thinking states such as New Jersey, which legalized recreational-use marijuana on April 21.
In 2022, estimates put U.S. legal cannabis sales at $33 billion – up 32% from 2021 – and at $53 billion by 2026. 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 end of 2022 and nearly $158 billion by 2026," Jenel Stelton-Holtmeier, editor of MJBiz Factbook, tells 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 excellent. Ultimately, the following 10 picks look like the best marijuana stocks (and funds) to benefit from this ongoing growth and maturation.
Data is as of Sept. 21. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
- Market value: $2.8 billion
- Dividend yield: 5.0%
Scotts Miracle-Gro (SMG, $51.11) has gotten hammered in 2022, with shares down more than 50% for the year-to-date.
The company made a big splash in the medical marijuana market in late March when cannabis investment firm RIV Capital (CNPOF) acquired Etain Health, one of New York state's original medical marijuana producers, for $247 million. Scotts invested $150 million in RIV Capital in August 2021 through issuing a six-year convertible note. In April, it made a follow-on investment of $25 million. Together, the investments represent a 42% ownership stake in RIV Capital.
These investments are part of the company's Hawthorne subsidiary, which provides commercial growers with the equipment and products necessary for indoor and hydroponic gardening. The cannabis industry is a big buyer of the segment's products, but due to an oversupply of cannabis, Hawthorne's business has slowed significantly.
In the first nine months of fiscal 2022, Hawthorne's sales fell by 50% to $547.7 million. Creating an additional headwind for SMG is a 7% year-over-year decline in revenue from its U.S. consumer business, which accounts for more than three-quarters of total sales. As a result, profits from both segments are substantially down from the same period in 2021.
Analysts generally remain upbeat about its business, with SMG boasting a consensus Buy recommendation and a median target price of $85, well above where it's currently trading. Speaking for the bulls is Raymond James analyst Joseph Altobello.
"Our Strong Buy rating on the shares of Scotts Miracle-Gro reflects our view that much of the company's current struggles, as challenging as they are, should prove temporary, as we expect demand to stabilize and replenishment orders to improve in its U.S. Consumer segment in the coming quarters, while the shakeout in the cannabis market should eventually drive improving results for Hawthorne beginning in fiscal 2023," Altobello says.
However, the analyst also warns that the company had cut its 2022 guidance on three occasions. As a result, investors of the marijuana stock should be prepared for a bumpy ride heading into 2023.
Innovative Industrial Properties
- Market value: $2.7 billion
- Dividend yield: 7.5%
Innovative Industrial Properties (IIPR, $96.91) 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 is now at 111 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 early September, IIPR acquired a property in Massachusetts with 104,000 square feet of industrial and greenhouse space for $21.5 million, or $207 per square foot.
The property produces an estimated 32,000 pounds of cannabis flower annually for Curaleaf Holdings (CURLF), its triple-net lease tenant. IIPR now leases five cultivation and processing facilities to Curaleaf, as well as three dispensary locations, comprising 578,000 square feet. It is the REIT's fifth-largest tenant by square feet.
Piper Sandler analyst Alexander Goldfarb gives the REIT an Overweight rating (equivalent of Buy) with a $135 target price, some 38% higher than current levels.
Goldfarb is currently watching the REIT's problems with Kings Garden, one of its tenants in California's Coachella Valley. The cannabis cultivator, which accounted for roughly 8% of IIPR's revenue in the second quarter, missed its July rents. However, the analyst believes a settlement could be "much closer than expected." As such, when it comes to marijuana stocks, the "investment opportunity" in this one "remains strong."
- Market value: $77.5 billion
- Dividend yield: 8.8%
On Sept. 6, Juul Labs agreed to pay almost $440 million to settle a two-year-old investigation by 33 states into the company's marketing practices for its high-nicotine vaping products. The settlement, which Juul Labs will pay out over six to 10 years, is approximately 25% of its 2021 revenues.
Marlboro parent Altria (MO, $43.01) paid $12.8 billion for 35% of Juul Labs in 2018. The company knew it was taking a risk when it invested. Since then, it has written down the value of its investment on several occasions. At the end of July, Altria valued its 35% interest at $450 million, down from $1.7 billion at the end of 2021.
Of interest to investors: UBS Global Research analyst Nik Oliver wrote in a July 28 post-earnings note to clients that Altria's latest write-down of its Juul investment puts the value of its stake below one-tenth of the original purchase price.
As a result, MO is free from the vapor non-compete it signed in 2018. Therefore, it can now pursue its own vaping ambitions, whether buying another vaping company or going alone. J.P. Morgan estimates the current U.S. e-cigarette market will double from $11 billion in 2021 to $22 billion by 2030.
As for its spot among the market's top marijuana stocks? Altria owns 45% of Cronos Group (CRON), a large Canadian marijuana firm. It also has warrants to acquire an additional 10% of the company, allowing it to control Cronos in the future. These warrants expire on March 8, 2023, so there is a possibility Altria will control Cronos by this time next year.
The company's 2022 earnings per share are expected to range between $4.79 and $4.93, representing annual growth of 6% at the midpoint.
Investors shouldn't forget that Altria owns 10% of Anheuser-Busch InBev (BUD). Stifel analysts recently suggested that Altria could monetize its minority investment for nearly $10 billion.
- Market value: $45.5 billion
- Dividend yield: 1.3%
Like Altria, Constellation Brands (STZ, $238.87) 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. 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 to 38.6%.
Constellation continues to hold warrants to exercise roughly 88.5 million shares by Nov. 1, 2023, and nearly 51.3 million shares by Nov. 1, 2026. They would give STZ more than 50% ownership in Canopy Growth if exercised.
However, any investment made in Constellation Brands in the hope that Canopy can turn around its business in the future requires significant patience from investors.
"If Canopy's stock price does not recover above our CAD$20.54 carrying value in the near-term, it may result in an impairment of our Canopy Equity Method Investment," Constellation Brands wrote in its fiscal first-quarter 10-Q.
Canopy's stock currently trades around one-quarter of the above share price. As a result, a special impairment charge could come in the next couple of quarters.
The good news is that as long as Constellation continues to profit from its three existing revenue streams, investors have a chance of eventually being nicely surprised by the company's stake in CGC.
And as of now, it is indeed profiting. Constellation Brands reported results for its fiscal first quarter at the end of June. Revenues of $2.4 billion were 17% higher year-over-year, while its operating income was $792.5 million, up 10%, driven by strong results on the top and bottom lines of its beer business.
- Market value: $4.1 billion
- Dividend yield: N/A
If you're looking for a pure-play cannabis company in the U.S., Massachusetts-based Curaleaf Holdings (CURLF, $5.78) is one 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.
CURLF operates in 21 states, including New York, New Jersey, Arizona, Florida, Illinois and Massachusetts. It owns and operates 136 dispensaries and 26 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 cannabis. Nineteen states and the District of Columbia have legalized adult-use cannabis. As more states allow for adult use of marijuana, Curaleaf should be able to continue to grow its business organically and through acquisitions.
In early August, CURLF announced that its European holding company acquired 55% of Four 20 Pharma GmbH, a German producer and distributor of medical cannabis. The company entered the German market in 2020 by launching its 420 Natural brand.
The German medical cannabis market is valued at 200 billion Euros ($203 billion). Four 20 Pharma has more than 10% market share. Once Germany legalizes adult-use marijuana starting in late 2023 or early 2024, the total addressable market for all types of cannabis should jump to approximately 1 billion Euros ($1.01 billion). And when that happens, Curaleaf has a 24-month window to acquire the remaining 45% of Four 20 Pharma.
CURLF finished the second quarter with $338 million in sales, which filtered down to adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $86 million – sequential increases of 8% 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: $938.1 million
- Dividend yield: N/A
Cresco Labs (CRLBF, $3.10), like Curaleaf, is a multistate operator with operations in 10 states, sporting 53 retail licenses, 21 production facilities and 53 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.
On July 8, the company announced that it will acquire U.S. and European cannabis cultivator Columbia Care (CCHWF) in an all-stock transaction worth $2.1 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 calendar year.
Once Columbia Care is in the fold, Cresco will be the largest multi-state operator (MSO), with more than $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.
In the second quarter, CRLBF saw a 4% year-over-year rise in revenues to $218 million. Adjusted EBITDA was $51 million, 11% higher than a year ago, representing 23% of its revenue. The company has the number one market share in Illinois, Pennsylvania and Massachusetts. Its retail revenue increased 22% year-over-year to $123 million, with 6% same-store sales growth.
Cresco is one of Wall Street's favorite marijuana stocks. Of the 17 analysts following the stock that are tracked by S&P Global Market Intelligence, 12 say it's a Strong Buy, 3 call it a Buy and two have it at Hold. Plus, the average target price of $8.80 implies the stock will nearly triple over the next 12 months or so.
- Market value: $1.8 billion
- Dividend yield: N/A
Tilray Brands (TLRY, $2.98) merged with Aphria in May 2021 to form Canada's second-largest licensed cannabis producer behind Canopy Growth. Since then, Tilray's shares have lost more than 80% of their value.
As part of CEO Irwin Simon's plan to make Tilray competitive no matter the regulatory environment for cannabis in the U.S., the company acquired Breckenridge Distillery in December 2021 for $103 million. Founded in 2008, the maker of bourbon whiskey and other premium spirits, generates approximately 85% of its revenue from its home state of Colorado.
On Sept. 8, Tilray announced that Breckenridge signed an expanded distribution agreement with Republic National Distributing Company that gives its products direct access to 38 U.S. states and Washington D.C.
These acquisitions and partnerships should help strengthen TLRY's already impressive fundamentals. In its fiscal 2022, which ended May 31, Tilray generated record revenue of $628 million, 22% higher than a year earlier. Excluding currency, revenues increased 29% year-over-year. Cannabis accounted for 43% of its annual revenue, distribution (37%), beverage alcohol (11%), and wellness (9%). The last two categories combined accounted for just 6% of revenue a year ago.
As far as cannabis goes, it generated 70% of its $237.5 million in revenue from adult-use cannabis products. International cannabis (18%), medical (10%), and wholesale (2%). Its cannabis revenue, less excise taxes, grew 17.9% over 2021. Tilray finished its fiscal year with an adjusted EBITDA of $48.0 million, 17.8% higher than a year earlier.
The company's most recent news centers around its strategic partnership with Quebec-based cannabis producer Hexo. Under the terms of the agreement, Tilray acquired Hexo's remaining senior convertible debt from HT Investments for $155 million, a 10.3% discount on the principal outstanding. TLRY can convert that debt into equity at CAD40 cents per share. If exercised, the company would gain 48% of Hexo's stock.
Despite Tilray's tough time on the charts, analysts still think there's plenty of upside for one of Wall Street's most well-known marijuana stocks. The average price target of $5.42 sits nearly 82% above TLRY's current perch.
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- Market value: $597.4 million
- Dividend yield: N/A
To better reflect all the company does, Sundial Growers rebranded to SNDL (SNDL, $2.51) at the end of July. It's part investment firm, cannabis and alcohol retailer, and part cannabis producer. Sundial Growers didn't adequately represent the changes that have taken place since CEO Zach George took over in January 2020.
It's been a busy 2022 for George.
At the end of March, SNDL completed its cash-and-stock acquisition of Alcanna. The deal significantly strengthened its retail platform, adding 171 liquor stores in Alberta and British Columbia and 78 cannabis stores in Alberta, Saskatchewan and Ontario. Combined with its Spiritleaf cannabis banner, the company has more than 180 locations across Canada.
"This is an exciting day for Sundial as we become a stronger and more capable regulated products platform," George stated in its press release announcing the completion of the transaction. "We are developing a business model that has never existed at this scale in Canada, and are committed to continuously improving our business while delighting consumers."
In July, the company's shareholders voted to approve a 1-for-10 reverse stock split to ensure its shares traded above $1 as part of Nasdaq's listing compliance. Post-consolidation, there were 238 million shares outstanding.
Lastly, SNDL announced on Aug. 22 that it would acquire the shares of cannabis products maker Valens (VLNS) that it didn't already own. Valens shareholders will receive 0.3334 shares of SNDL for each share of VLNS they currently own. Together, SNDL will control 4.5% of the Canadian cannabis market and 5.2% of the 2.0 product formats market. In addition, it will be a top 10 player in both markets – and becomes one of the more interesting marijuana stocks to watch going forward.
AdvisorShares Pure US Cannabis ETF
- Assets under management: $590.8 million
- Expenses: 0.73%, or $73 annually on a $10,000 investment
The AdvisorShares Pure US Cannabis ETF (MSOS, $10.58) 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 fifth-largest holdings with 16.9% and 8.1%, respectively.
The portfolio is managed by Dan Ahrens, who also happens to be AdvisorShares' chief operating officer. Ahrens also 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," say Needham analysts Matt McGinley and Chad Britnell.
While 2022 hasn't been a good year for cannabis stocks or ETFs – MSOS is down about 50% for the year-to-date – the possible future passage of the Secure and Safe Enforcement (SAFE) Banking Act will be extremely positive for the struggling industry, and publicly traded marijuana stocks and ETFs such as MSOS.
It's down, but it's not out.
Global X Cannabis ETF
- Assets under management: $52.5 million
- Expenses: 0.50%
Compared to the ETFMG Alternative Harvest ETF (MJ), which dates back to December 2015, the Global X Cannabis ETF (POTX, $14.78) is a relative newcomer to cannabis funds. That's reflected in its small asset base of $53 million, approximately one-seventh the size of MJ.
However, what it lacks in asset size, it makes up for with Canadian 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. Nearly 70% of the ETF's holdings are Canadian companies.
By comparison, the MJ ETF tracks the performance of the Prime Alternative Harvest Index, which in addition to tracking cannabis stocks, also includes cigarette manufacturers such as Altria and a 25.2% 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 55%.
When you consider the performance of POTX compared to MJ – the former is down more than 73% over the past year, while the latter is off by about 66% – 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 can't move on U.S. expansion until the federal government legalizes cannabis. Over the summer, there was hope that legislation proposed by Democratic Senate Majority Leader Chuck Schumer would be passed into law. That now appears dead in the water until after the November midterm elections. Perhaps longer.
Of the two cannabis ETFs featured in this article, POTX is the contrarian play.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.