There's no denying that last year was ugly for marijuana stocks, with a capital "U." It was supposed to be the year that the pot industry demonstrated its ability to turn a profit on a broad scale, but instead wound up being a complete mess. Canadian growers have been contending with supply issues since day one of legalization on Oct. 17, 2018, while exorbitant tax rates in certain U.S. states have fueled an ever-resilient black market.
Amazingly, though, a half-dozen cannabis stocks bucked this trend and ended the year higher by at least 47% (when rounded). Say hello to the top marijuana stocks for 2019.
The Valens Company: Up 138%
If broken down into the tenths of a percent, The Valens Company (OTC: VLNCF), which until recently was known as Valens GroWorks, outpaced the next company on this list by 0.7% in full-year return. Thus, with a 138% return, extraction-services provider Valens is crowned the best marijuana stock of 2019.
What worked for Valens? How about everything! As an extraction-services company, it's in the midst of the biggest trend within the cannabis movement -- i.e., the launch of derivatives (vapes, edibles, topicals, and infused beverages). Valens provides resins, distillates, concentrates, and targeted cannabinoids, as well as offers white-label production services for derivatives. Since extracts are the cornerstone of recently launched derivatives in Canada, and derivatives bear significantly juicier margins that traditional dried flower, it pretty much means that Valens is one of a small number of go-to middlemen for the pot industry.
We've already begun to see the fruits of Valens' work paying off in the company's quarterly results. In mid-October, Valens turned in $16.5 million Canadian in third-quarter sales, which was up 87% from the sequential second quarter. This led to an impressive CA$5.9 million in net income. With 425,000 kilos in run-rate processing capacity under its belt, and the company pushing toward 1 million kilos per year, profits could very well head higher.
MediPharm Labs: Up 138%
So nice, we'll do it twice. MediPharm Labs (MEDIF -0.17%) may not have outpaced Valens' year-end gains, but it's also an extraction-services provider in Canada that's been basking in the demand for extracts to create derivatives.
One thing I didn't mention above, but which is true for both Valens and MediPharm Labs, is that extraction companies aren't typically operating with one-off agreements. Rather, they're signing volume and price commitments that are locked in for 18 to 36 months. This allows a processor like MediPharm to know well in advance what sort of cash flow to expect, as well as how much it can expend while still maintaining profitability.
Speaking of profits, MediPharm has delivered two consecutive quarters in the green (through September), which is really impressive considering that it didn't begin processing hemp and cannabis biomass until Nov. 2018. Sales in the third quarter hit CA$43.4 million, up 38% from the sequential quarter, with CA$9.5 million in net income, combined, over the past two quarters.
MediPharm is working its way toward 500,000 kilos in annual processing capacity and recently applied to uplist to the Nasdaq.
Village Farms International: Up 91%
Even though it gave back a lot of its first-quarter gains, cannabis, hemp, and vegetable producer Village Farms International (VFF 2.68%) still came up big for its shareholders with a 91% return in 2019.
One part of the winning formula for Village Farms has been the early success of its joint venture cannabis grow farm, Pure Sunfarms, with Emerald Health Therapeutics. The 1.1-million-square-foot Delta 3 greenhouse is already operating at full run-rate capacity of 75,000 kilos per year. Meanwhile, a second, adjacent 1.1-million-square-foot greenhouse (known as Delta 2) should be running at full annual run-rate capacity of 75,000 kilos of cannabis by the end of 2020. With three decades of vegetable-growing experience in its corner, Village Farms has succeeded in cultivation where others have stumbled in the early stages.
There's also a lot of excitement surrounding its joint venture hemp operations in the United States. Through September, the company's joint venture had harvested 625 acres of 870 acres of planted hemp, with plans to begin selling this biomass in the fourth quarter of 2019 and throughout 2020. Hemp is rich with cannabidiol (CBD), the nonpsychoactive cannabinoid best-known for its perceived medical benefits.
Planet 13 Holdings: Up 80%
The top-performing U.S. pot stock in 2019 goes to small-cap multistate operator (MSO) Planet 13 Holdings (PLNH.F 2.13%), which delivered an 80% return for its shareholders.
Unlike most U.S. MSOs that are trying to establish a retail, cultivation, and processing presence in as many legalized states as possible, and might be spreading themselves thin in the process, Planet 13 has approached retail differently. It has one operating location right now -- a 112,000-square-foot SuperStore just west of the Las Vegas Strip in Nevada. No retailer can offer the experience that Planet 13 can, with the SuperStore eventually housing a pizzeria, coffee shop, events center, and consumer-facing processing center, when complete.
Planet 13 is also winning over investors with its top-notch transparency. The company has been posting foot traffic, paying customer, and average ticket size data every month since opening its doors Nov. 1, 2018. The SuperStore is currently responsible for about 9% of the Silver State's total monthly weed sales, and I expect this figure to grow given the uniqueness of the shopping experience Planet 13 provides.
Innovative Industrial Properties: Up 67%
It should come as little surprise that cannabis-focused real estate investment trust Innovative Industrial Properties (IIPR 0.01%) found its way onto a list of the top marijuana stocks for 2019. It has, after all, been generating quarterly profits with consistency for some time now.
Innovative Industrial Properties' business model involves acquiring marijuana cultivation and processing facilities and then leasing these assets out for very long periods of time (10 to 20 years). Along with modest organic growth derived from annual rental increases and property management fees that are based on these higher rental rates, Innovative Industrial has exceptionally predictable cash flow and low operating expenses.
Having begun 2019 with 11 properties in its portfolio, it ended the year with 46 properties spanning 14 states. Of these 46 assets, the remaining weighted-average lease length is 15.3 years, with a 13.6% average return on invested capital. Or, in English, the company should see a complete payback on its invested capital in just over five years, with everything after that being gravy.
Considering that the U.S. federal government is highly unlikely to legalize pot in 2020, access to capital for MSOs will remain dicey, at best. This means IIP remains in the driver's seat to secure more properties as MSOs look to sell and then rent grow and processing sites to bolster their cash positions.
Trulieve Cannabis: Up 47%
Finally, vertically integrated MSO Trulieve Cannabis (TCNNF 1.14%) was relatively unstoppable, with a year-end gain of 47%.
Although we've witnessed a small handful of pot stocks generate a profit here and there, Trulieve's third-quarter report is the most robust profit we've seen yet. Despite being focused on just one market, the company's quarterly sales of $70.7 million topped what Canopy Growth generated during the same time period in Canada. More important, Trulieve generated close to $24 million in operating profit even without the aid of one-time benefits and fair-value adjustments in the third quarter. No pot stock is delivering beefy profits like this at the moment.
The secret sauce to Trulieve's success has been its laser focus on the Florida market. Having opened 40 stores in the Sunshine State, it's been able to keep its expenses close to the vest, as well as effectively market and brand its medical marijuana products. Trulieve's opportunity may grow further if Florida decides to legalize adult-use weed later this year.