One thing growth investors love about a fledgling industry, such as the cannabis industry, is that there are some fantastic returns to be made. Fast-growing companies with stellar sales numbers can captivate investors and generate lots of bullishness. However, sooner or later that excitement can fizzle out as investors start to focus on valuations (especially if there's another market crash), sending share prices back down.

Three stocks that have been among the hottest cannabis buys of 2020 include GrowGeneration (GRWG)Innovative Industrial Properties (IIPR -1.26%), and Green Thumb Industries (GTBIF -0.80%). They all doubled (or more) in value in the past year even as the Horizons Marijuana Life Sciences ETF fell by about 10%. But given their impressive gains and the stock market near record highs, is it too late to invest in these companies? Let's take a closer look and find out.

Cannabis greenhouse.

Image source: Getty Images.

1. GrowGeneration

Hydroponics and gardening company GrowGeneration is in the business of helping companies and individuals grow cannabis and other crops. For cannabis investors, it's an attractive investment because you don't need to worry about the quality of the company's crops or whether they've been sitting too long. Since GrowGeneration provides the tools -- whether it's gardening equipment or just pipes, pumps, and other items to make a small hydroponics system -- it's a pick-and-shovel type of investment that possesses less risk than investing directly in licensed producers.

But in 2020, its strategy also generated significant growth. In its most recent earnings results, released on Nov. 11 for the period ending Sept. 30, it posted record revenue of $55 million, up 153% from the prior-year period. It was the 11th consecutive time GrowGeneration posted record sales numbers. Those impressive results propelled the stock to gains of more than 800% during 2020. 

For 2021, the Colorado-based business is projecting revenue will reach between $280 million and $300 million, which would be at least a 47% improvement from the $185 million to $190 million in sales it's projecting for the full year of 2020.

If the company comes through on that guidance, it could continue to be a great buy in the new year. The challenge, however, is that if it falls short of those projections, its shares could struggle. With the stock price close to its high for the year and trading at a price-to-earnings (P/E) multiple of more than 700 (the typical stock on the S&P 500 trades closer to a multiple of 27), GrowGeneration investors could be vulnerable in the event of a market crash.

Although the company is experiencing significant growth, its valuation is a bit rich, making it unlikely for its stock to be as hot of a buy this year as it was in 2020. Investors who have made a good profit off the stock may want to consider selling it today. 

2. Innovative Industrial Properties

Innovative Industrial is a cannabis stock that isn't directly involved in the growing of marijuana. It's a real estate investment trust (REIT) and its strategy is to acquire properties (often distressed assets that it can get for cheap) and lease them out to cannabis producers. This has proven to be a great way for Innovative Industrial to rapidly grow its top and bottom lines.

Through the first nine months of 2020, Innovative Industrial's sales nearly tripled from just $27 million a year ago to $79.8 million. And much of that increase has flowed through to the bottom line. The REIT reported a profit of $43.4 million, a 245% increase from the $12.6 million in net income it posted a year ago. The 63 properties in its portfolio as of Sept. 30 are also more than double the 31 locations it owned the same time last year.

To keep the growth going, acquiring more properties is likely going to be key to the California-based company's strategy. And the good news is that with five states (Arizona, Mississippi, Montana, New Jersey, and South Dakota) passing some sort of marijuana reform in November, new opportunities will soon be on the horizon for Innovative Industrial.

Although the REIT's shares rose 140% in 2020, the growth opportunities that lay ahead along with the stability that its business model offers make this stock a good buy. Its P/E ratio is near 60, which is still a bit high, but looks like a deal compared to GrowGeneration. And it could quickly come down if Innovative Industrial's bottom line continues to get stronger. Plus, with an above-average dividend yield of 2.6% that pays better than the 1.8% you might hope for with the typical stock on the S&P 500, there's some extra incentive to hold on to shares of Innovative Industrial -- good dividend stocks are hard to come by in the cannabis industry.

3. Green Thumb Industries

Green Thumb is the only marijuana producer on this list, but its performance over the past year has been strong, producing returns of 147% for its shareholders. The multistate marijuana company has operations in 12 U.S. markets and owns licenses for 96 retail locations. Its diverse business focuses on both selling branded products and operating retail stores, giving Green Thumb multiple avenues to grow its business.

On Nov. 11, the company released its latest results for the third quarter ended Sept. 30, with sales of $157.1 million rising 131% from the prior-year period. The company also hit a milestone, turning profitable for the first time with a net income of $9.6 million.

It's a great start, but the lack of consistent profitability means the P/E ratio isn't available to evaluate Green Thumb's current stock price. The price-to-sales (P/S) multiple can be used in its place, and Green Thumb compares well against the other marijuana stocks, including Curaleaf and Trulieve Cannabis, showing that it isn't overpriced given its strong revenue numbers: 

GTBIF PS Ratio Chart

GTBIF PS Ratio data by YCharts

With a decent P/S multiple, some strong results of late, and still plenty of room for more growth as the company owns 96 retail licenses, Green Thumb's stock could be due for a great year in 2021. But I would wait at least until the company's next earnings report to see if it can produce a profit for another period. A strong (and consistent) bottom line combined with the growth the company might achieve in the coming year from new markets opening up could make the stock a scorching-hot buy.