For years, marijuana stocks were the hottest investment on Wall Street. The expectation of taking an industry that does tens of billions of dollars in illicit sales annually and moving those dollars to legal channels proved far too enticing for Wall Street and investors to ignore.
However, the past 14-plus months have been nothing short of a disaster for cannabis stocks. A flurry of supply issues throughout Canada, crippling high tax rates on legal product in the U.S., financing concerns throughout North America, and now a global pandemic, have all contributed to the pot industry's struggles.
But if there's one important thing you need to know about marijuana stocks, it's that they're not all built alike. Although some are struggling mightily and (pardon the pun) a weeding out of the field has been long overdue, a handful of pot stocks are well-positioned to thrive during periods of instability and even a stock market crash. Here are five such names that investors can expect to thrive in virtually any economic environment.
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Trulieve Cannabis
In terms of operating income, U.S. multistate operator (MSO) Trulieve Cannabis (TCNNF +0.70%) is the king of the hill. Last year, Trulieve generated almost $253 million in sales, leading to $86.6 million in operating income, before fair-value adjustments and other one-time benefits were taken into consideration.
The secret to Trulieve's success is that it's uniquely focused on the Sunshine State. Despite having recently opened its 50th dispensary, 48 of these retail locations are in Florida. By focusing its efforts on medical marijuana-legal Florida, Trulieve has been able to successfully build up its brand and create an attachment with medical patients without having to spend profusely on marketing.
Eventually Trulieve is going to apply the same approach to markets outside of Florida, such as Massachusetts, Connecticut, and California. But for the time being, Trulieve's monstrous market share lead in Florida makes it a safe bet to thrive during stock market corrections and crashes.
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Innovative Industrial Properties
Whereas Trulieve Cannabis is the most profitable pot stock on a nominal basis, real estate investment trust (REIT) Innovative Industrial Properties (IIPR 0.65%) is the most profitable cannabis stock on a per-share basis.
Like any REIT, Innovative Industrial Properties seeks to acquire assets that it can then lease out for extended periods of time, thereby reaping the rewards of rental income. In this instance, it's acquiring cultivation and processing sites for the cannabis industry. To date, it has 57 assets in its portfolio spanning 15 states and totaling 4.3 million square feet. Because the weighted-average lease length of these properties is 16 years, IIP has a long runway of highly predictable cash flow.
Further, even though management stopped reporting its average yield on invested assets, it's believed to be around 13%, based on what was last reported during the first quarter. This implies a complete payback on its invested capital in less than six years.
Innovative Industrial Properties also benefits from the aforementioned lack of basic financial services to cannabis companies. As long as cannabis banking reform remains off the table in the Senate, IIP's sale-leaseback arrangements will remain popular among MSOs.
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Green Thumb Industries
There's little question that U.S. MSOs are in much better position to grow at the moment than Canadian licensed producers, which is why Green Thumb Industries (GTBIF 0.20%) makes the list as a logical winner during periods of market instability.
Unlike Trulieve, Green Thumb does have national appeal. It's closing in on having four dozen operational dispensaries throughout the country, with licenses to open as many as 96 stores in 12 states. Green Thumb fully expects to see its sales surge in the near-term with the company opening a number of locations in Illinois, a state that recently opened its doors to recreational sales, and Nevada. By mid-decade, Nevada's strong tourism industry could allow it to lead all states in cannabis spending per capita.
Another key profit driver for Green Thumb is that roughly two-thirds of its revenue is coming from derivatives, such as edibles and vapes. Alternative consumption options are most appealing to a younger generation of users, and they have significantly higher margins than dried cannabis flower.
Lastly, don't overlook the fact that Green Thumb secured $105 million in debt financing in May 2019, and has entered into sale-leaseback agreements with IIP. Cash isn't a concern for Green Thumb.
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Cresco Labs
Sticking with the theme of U.S. MSOs., Cresco Labs (CRLBF 0.30%) also looks to be in good position to thrive in the event of a stock market correction or crash.
Earlier this year, Cresco Labs completed its all-share acquisition of Origin House. Although Origin House did increase Cresco's cultivation square footage, the prize of this deal was gaining access to cannabis distribution licenses in California, the biggest marijuana state by annual sales. Owning Origin House means Cresco can now sell its branded products in more than 575 dispensaries throughout the Golden State, which should grow its sales considerably faster than if it were simply attempting to open as many dispensaries as possible.
However, it is worth noting that Cresco Labs does hold 29 retail licenses, 17 of which are already operational, with a retail presence in six states. Beyond its unique access in California, Cresco has been particularly excited about Illinois, which should be a billion-dollar marijuana market by 2024. Seven of the company's 17 operational locations are in Illinois.
Similar to Green Thumb, Cresco Labs secured a $100 million credit facility from a consortium of investors in February 2020 that could be doubled in size if agreed to by both parties. With Cresco also leaning on sale-leaseback agreements with IIP, financing is not a concern.
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Valens
Finally, a stock market crash shouldn't scare investors out of the only Canadian company to make this list, Valens (VLNCF +0.00%).
Valens is an extraction-services provider. This means it takes cannabis and hemp biomass and processes it to yield the resins, distillates, concentrates and targeted cannabinoids that go into making derivatives. Considering that derivatives launched in Canada six months ago, and that they offer substantially juicier margins than dried cannabis flower, Valens' middleman processing services are likely to grow in demand for the foreseeable future.
Valens also benefits from signing its clients to price and volume commitment contracts that are often good for a year or two. These contracts help reduce revenue lumpiness and allow the company to outlay capital for projects with incredible near-term visibility. This visibility plays a key role in keeping Valens profitable.
During the first quarter, Valens recorded $32 million Canadian in sales, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of CA$14.3 million, and a CA$0.02 per share profit -- its third straight profitable quarter. If Valens can make money even with all of Canada's operational issues and a pandemic ongoing, imagine what'll happen as this market matures.
