In 2017 and 2018, investors piled into cannabis stocks as word spread of the “next big thing.” Canada made global history when it became the second country in the world and the first G7 nation to legalize cannabis federally. Emerging players spoke of big plans, which stoked investor enthusiasm. Amid the initial excitement, legislative progress was slow, and competition in the stifled marketplace kept prices low. By April 2019, early-stage growth hiccups caused share prices to change direction, and since then, the vast majority of pot stocks have seen a 50% or more decline in value.
The cannabis industry may not have been the explosive growth opportunity that early investors had anticipated, but there is still tremendous long-term upside. 37 U.S. states and four U.S. territories have laws that permit the use of marijuana. While it is still illegal on a Federal level, President Biden’s proclamation on October 7th included a request for the attorney general “to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.” Many see this as a major step in the right direction, but it’s expected to be a slow road.
No one can predict when significant legislative changes will occur or how taxation will affect costs. Along with the possibility of tremendous upside opportunity, uncertainty is there. Stock selection is critical in the Marijuana space. Investors should look for competitive companies with the liquidity to sustain themselves. This list will discuss three potential winners from the space.
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U.S.-based Trulieve Cannabis (TCNNF) stands out as one of the few cannabis companies that have been able to turn a steady, meaningful profit, with four years of consistent quarterly profitability under its belt. That is, up until its most recent quarter, when the company reported a net loss on the bottom line of $22.5 million, compared to the net income of $40.9 million reported for the previous year’s quarter. However, much of the loss can be attributed to one-time charges related to Trulieve’s recent acquisition of Harvest & Recreation Health. The quarterly net loss came in at around $1.1 million without the one-time charges.
While the company’s recent loss might be looked at as a step in the wrong direction, it’s common to see this following a major acquisition. Trulieve’s cannabis revenue has been following a steady upward trajectory since well before the acquisition took place. During the second quarter, revenue increased by 49% year over year to $320.3 million.
The company has been steadily expanding operations, nearly tripling in size over the past few years. Since June 2020, when it had just 52 dispensaries, all located in the state of Florida, the company operates 177 market-leading dispensaries throughout 11 states. It has successfully done so to preserve its position as a major player in this increasingly competitive market.
Trulieve Cannabis garners a 100% Buy rating from the 18 analysts offering recommendations. A median price target of $28.71 represents a 169.62% upside. TCNNF stands as one of the best picks to profit from the cannabis opportunity.
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As long as marijuana remains illegal at the federal level, access to credit markets for pot companies will be spotty at best. Marijuana-focused real estate investment trust Innovative Industrial Properties (IIPR) buys medical marijuana cultivation and processing facilities in legalized states with cash and leases these properties back to the seller. It’s a win-win agreement that provides cash to cannabis companies while netting IIP long-term tenants.
IIPR provides investors ground floor access to exponential growth potential along with the reliability of a REIT. As of early September, Innovative Industrial Properties owned 111 properties covering 8.7 million square feet of space in 19 states. Moreover, 99% of its tenants were on time with their rent as of the end of June. Over the past five years, IIPR’s quarterly payout has grown by 1,100%. The REIT currently boasts a 7.74% yield.
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President Biden spoke of three executive actions surrounding cannabis pardons and initiating a review on cannabis scheduling, potentially setting the stage for federal-level legalization of marijuana. “As I often said during my campaign for President, no one should be in jail just for using or possessing marijuana. Sending people to prison for possessing marijuana has upended too many lives and incarcerated people for conduct that many states no longer prohibit. It’s time that we right these wrongs,” said president Biden.
As a result, many of the pros on Wall Street are upping their expectations for cannabis businesses in 2023. “We could be on the cusp of a secular cannabis bull market,” said Stifel analyst Andrew Partheniou.
The potential legalization of cannabis is likely to be a significant positive catalyst for the leader in net cannabis revenue, Tilray (TLRY). The company has a presence in all key markets, with a focus on recreational and medicinal cannabis; the addressable market is significant and expanding.
Following the big White House announcement earlier this month, TLRY surged 22% but gave back some of those gains when the company reported Q1 2023 revenue and EPS misses. The company has its sights set on yearly revenue of $4 billion by 2024, a realistic target if regulatory hurdles wane. At $3.52 per share, TLRY currently trades at -8x forward earnings. The stock remains deeply oversold and is worth buying even after the recent uptick.