3 best cannabis stocks to buy for the long haul

A Ten years ago, only 16 states allowed the sale of marijuana for medical purposes, and none had yet legalized its sale for recreational purposes. Today, 36 states allow the sale of medical marijuana, and 18 of them, plus two territories and the District of Columbia, have also passed laws allowing the sale of recreational marijuana.

So it’s easy to see which way the smoke is blowing for the cannabis industry, but that doesn’t mean all cannabis companies are good investments.

As is often the case in any new industry, there is a lot of upheaval in the cannabis space, with changing regulations, lots of new businesses and changing consumer tastes. It means that there are a lot of risks, but for me, Cresco Laboratories (OTC: CRLBF), Trulieve Cannabis (OTC: TCNNF), and Innovative industrial properties (NYSE: IIPR) seem to be three of the best long term bets.

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Cresco sticks to its business plan

Multi-state operator Cresco Labs has focused on limited license states because these markets are more profitable and less competitive. It has nine outlets in Florida and 10 in Illinois. She recently bought three dispensaries in Pennsylvania for $ 90 million, bringing her total to seven. All three are limited license states.

The company currently has 37 retail outlets, 47 retail licenses and a large wholesale company that has placed its approximately 350 cannabis products in more than 1,000 dispensaries across the United States.

The stock prices of many cannabis companies have fallen in recent times, including Cresco. The ETFMG Alternative Crop ETFs, which tracks the industry, is 56% from a high in late February. Cresco shares are down 50% over this period. Given the company’s financial strength, however, I think this sale presents a good buying opportunity.

In the second quarter, it posted revenue of $ 210 million, up 17.7% sequentially and 122.8% year-on-year. It also reported net income of $ 2.7 million, compared to net losses of $ 24.1 million in the first quarter and $ 41.7 million in the second quarter of 2020. It also increased Adjusted EBITDA to $ 45.5 million, a 30.1% increase sequentially.

Cresco is unusual in the industry due to its strong wholesale business. In the second quarter, its wholesale sales were $ 108.7 million, up 13.7% quarter over quarter and 97.9% year over year. Its retail sales brought in $ 101.3 million, up 22.3% from the previous quarter and 157.6% from the same period in 2020.

Trulieve keeps growing

Trulieve’s stock has fallen by more than 13% in the past year. An unusual issue that added to the downward pressure on MSO’s share price was that JT Burnette, husband of Trulieve CEO Kim Rivers, was convicted of extortion, service mail fraud honesty, travel violation and lying to the FBI in a recent public corruption trial. These events affected the stock although Burnette has no direct trading relationship with Trulieve.

However, if you look at the company’s financial data, there are plenty of reasons to believe that now is the time to buy. In the second quarter, Trulieve reported six-month revenue of $ 408.9 million, up 89% year-on-year, and net income of $ 71 million, up 67% from same period in 2020. Trulieve has also just completed its agreement to purchase Harvest Health and Recreation, making it one of the largest MSOs in the industry. Trulieve reported second quarter revenue of $ 215.1 million; Combined with Harvest’s revenue of $ 102.5 million, the total of $ 317.6 million in sales for the quarter would make it No. 1 among public cannabis companies. Trulieve now operates 126 clinics, 94 of which are in Florida alone, through its Harvest Health agreement.

Innovative industrial properties are essential to industry

Innovative Industrial Properties, a real estate investment trust (REIT) that buys properties from cannabis companies and then re-leases them to sellers, has avoided the general malaise that has plagued the cannabis industry in recent times.

That’s because the REIT’s long-term triple net leases – which have an average of 16.7 years remaining – make it less susceptible to short-term headwinds. As of October 1, the company said it had 75, fully leased properties located in 19 states with 7.3 million rentable square feet, including properties under development or under renovation. Innovative Industrial’s stock is up over 30% this year.

In the first six months of 2021, Innovative Industrial Properties had adjusted Funds From Operations (AFFO) by $ 81.4 million, more than double its AFFO of $ 38.8 million compared to the same period last year. Net income was $ 54.6 million, up 222% year over year. AFFOs per share were $ 3.11, compared to $ 2.31 in the prior year period.

Innovative Industrial Properties is also delivering a good dividend and has increased its payouts for six straight quarters, including a 7% increase from $ 1.40 to $ 1.50 per share this quarter. Since starting to distribute dividends in 2017, it has increased its quarterly payouts by 900%.

Perhaps the greatest fear with innovative industrial properties will materialize if cannabis is ever decriminalized at the federal level. This would open up more sources of funding for cannabis companies and limit the growth of the business. Federal legalization doesn’t seem to be on the horizon any time soon, however, and when it does, there will always be companies that choose the REIT’s leaseback option.

A lot of growth thanks to these actions

I like the long term potential of the three stocks. Cresco and Trulieve have the size and reach to survive industry turmoil, and with their stock prices declining, I think now is a good time to buy one or the other.

Based on its lower price-to-sell ratio, Cresco appears to be the better buy of the two, especially because its strong wholesale sales give it an edge. Innovative Industrial Properties is a better stock for risk showers, although at its current price, that is not the business of the other two.

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Jim Halley owns shares of Innovative Industrial Properties. The Motley Fool owns shares and recommends Cresco Labs Inc., Innovative Industrial Properties and Trulieve Cannabis Corp. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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