Marijuana stocks have given cannabis investors nothing but false starts over the past few years. Most recently, there have been a plethora of issues facing the industry, 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.
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. That's despite a continued delay in federal legalization and ongoing stalling by lawmakers on the SAFER Banking Act, legislation that aims to improve cannabis companies' access to finance.
You can thank a growing number of forward-thinking states, such as Ohio, which legalized recreational marijuana use in November.
Estimates from Whitney Economics, a cannabis and hemp consulting firm, suggest legal cannabis sales (adult-use and medical) could reach $31.4 billion this year, up 9.1% over 2023.
"Cannabis legal sales have been suppressed since the end of the pandemic, partly due to changes in consumer purchasing behavior, macro issues such as higher interest rates, declining cannabis business conditions and slower than normal regulatory implementations in new markets," the firm said in a press release. "Despite these headwinds, growth rates have remained positive in the U.S. overall."
Additionally, in late April, news the Drug Enforcement Administration (DEA) will recommend reclassifying marijuana as a Schedule III drug vs its current Schedule I status gave cannabis stocks a big boost. The process is in the early stages, but once complete, it will clear a major regulatory hurdle for cannabis companies.
Ultimately, the following picks look like the best marijuana stocks (and fund) to benefit from this ongoing growth and maturation.
- Market value: $2.9 billion
- Dividend yield: 7.0%
Innovative Industrial Properties (IIPR, $103.40) is a real estate investment trust (REIT) that invests in greenhouses and industrial facilities for the medical cannabis industry. It was founded in 2016 with just one property under its umbrella. This grew to 66 by the end of 2020, and IIPR's portfolio is now at 108 properties.
The REIT's diversified portfolio of 8.7 million square feet of rentable space spans 19 states, including Illinois, California and Pennsylvania.
In 2023, the REIT stock generated total revenue of $309.5 million, up 12% over 2022. Additionally, its adjusted funds from operations (AFFO) — a key REIT earnings metric — jumped 10% year-over-year to $256.5 million.
The company also increased its annual dividend to $7.28 per share from $7.20 per share, the sixth straight year it has raised its payout. This is encouraging news for cannabis investors seeking out the best dividend stocks to buy.
Admittedly, Wall Street is sitting on the sidelines when it comes to IIPR. The consensus estimate of the seven analysts following the marijuana stock tracked by S&P Global Market Intelligence is Hold.
Piper Sandler analyst Alexander Goldfarb is one of those with a Neutral (Hold) rating on IIPR. The outlook for the industry is improving based on expectations the Department of Health and Human Services (HHS) will reschedule cannabis, "which will allow operators to take advantage of normal course tax deductions," Goldfarb says. But "the reality for IIPR remains a still-cautious investment market where capital remains precious."
- Market value: $3.9 billion
- Dividend yield: 3.9%
Scotts Miracle-Gro (SMG, $68.54) 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 2024 first-quarter results reported on February 7. Hawthorne's revenue for the three months was just $80.1 million, nearly 75% lower than what was reported two years earlier.
Most of the decline in SMG's share price from its April 2021 all-time high are a result of the relative collapse of its Hawthorne business. While revenue in Scotts' U.S. consumer business is down from the surge in sales caused by the pandemic, it's still significantly higher than pre-pandemic. Overall, Scotts' business is in good shape.
CEO Jim Hagedorn is optimistic about the cannabis industry.
"The federal government is moving closer to rescheduling cannabis as a Schedule 3 drug to make [the] justice system more fair and reduce taxes on plant-touching business by over 50%," Hagedorn said in the company's fiscal Q1 earnings call. "This can be a major catalyst to cultivators reinvesting in their operations. Adoption of the Safer Banking Act is on the table as well, which would give the industry access to normal bank capital."
SMG is one of the best marijuana stocks for valuation too. Shares are trading at 1.12 times sales, which is considerably cheaper than its five-year average multiple of 1.35.
- Market value: $842.5 million
- Dividend yield: N/A
Cresco Labs (CRLBF, $2.48) is a multi-state operator (MSO) with operations in eight states, sporting 64 retail licenses, 13 production facilities and 71 operational dispensaries. Its national brands include Cresco, Good News, Remedi and Mindy's (edibles).
Like many of the larger marijuana stocks, Cresco is expanding its business through both organic and acquisitive growth.
In 2023, the company added 16 stores across Florida and Pennsylvania, two states where medical marijuana use is legal. In 2024, the company is focusing its efforts on Ohio, where voters last fall legalized recreational marijuana.
In the fourth quarter, CRLBF saw a 2% year-over-year decline in revenue to $188 million. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) nearly doubled year-over-year to $55 million. Additionally, Cresco Labs finished the fiscal year with $59 million in operating cash flows and $109 million in the bank.
Cresco is one of Wall Street's favorite marijuana stocks. Of the 13 analysts following the stock, 10 give it a Strong Buy, one has it at Buy and one calls it a Hold.
- Market value: $4.6 billion
- Dividend yield: N/A
If you're looking for a pure-play cannabis company in the U.S., Massachusetts-based Curaleaf Holdings (CURLF, $6.28) 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 17 states, including Arizona, Florida, Illinois and Massachusetts. It owns and operates 145 dispensaries and 21 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 40 states, as well as Washington, D.C., have legalized medical marijuana. Twenty-four 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.
In early 2023, the company announced that it had cut 10% of its payroll and said it would close its production and cultivation facilities in Oregon, California and Colorado so that it can focus on its strongest markets.
These efforts appear to be bearing fruit. In its fourth-quarter results, the company generated record revenue of $345 million. CRLF also disclosed a per-share loss of 1 cent vs a per-share loss of 5 cents in the year-ago period.
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: $1.9 billion
- Dividend yield: N/A
Since Tilray Brands' (TLRY, $2.476) 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 85%.
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 in late 2022 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 last year bought eight beer and beverage brands from Anheuser-Busch InBev (BUD) .
A year ago, Tilray's beverage alcohol revenue in its fiscal third quarter, which ended February 28, 2023, was $20.6 million, or 14.1% of the $145.6 million in net revenue in the quarter. This year, its fiscal Q3 beverage alcohol revenue was $54.7 billion or 29% of its total revenue.
While Simon continues to pull different levers to add value for shareholders, Tilray remains, at the core, a cannabis business. In its most recent report, cannabis accounted for 33% of its quarterly revenue.
It'll take a while, so investors in one of Wall Street's best marijuana stocks can likely expect more non-cannabis acquisitions in 2024.
- Assets under management: $1.3 billion
- Expenses: 0.83%, or $83 annually on a $10,000 investment
The AdvisorShares Pure US Cannabis ETF (MSOS, $11.26) 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 20.6% and 6.1% 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 plunged 30% in 2021 and 73% in 2022. However, things appear to be stabilizing for this basket of the best marijuana stocks. Indeed, MSOS ended flat for 2023 and is up 60% so far this year.
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.
Learn more about MSOS at the AdvisorShares provider site.
