2021 will be one of the best years ever for the U.S. cannabis industry. That's my prediction. And I don't have to have the ability to see into the future to know that it has a pretty good chance at coming true.
With the Democrats in control of the White House and both house of Congress, the likelihood that meaningful cannabis reform will be passed at the federal level is greater than ever. While the potential for marijuana to be decriminalized opens up opportunities for Canadian marijuana stocks, I think that the U.S.-based stocks will be even bigger winners. Here are what I view as the three best marijuana stocks to buy for 2021.
1. Cresco Labs
Cresco Labs (OTC:CRLBF) delivered a strong performance in 2020 with its shares soaring 44%. That wasn't nearly as impressive as several of its peers, though. I look for Cresco to crank it up this year.
In the third quarter of 2020, Cresco generated revenue of $153 million. That total lagged behind only Curaleaf and Green Thumb Industries among U.S. multi-state cannabis operators. But Cresco's market cap is less than half the size of Green Thumb's and barely over one-fourth the size of Curaleaf's.
My view is that investors aren't fully appreciating the value of Cresco's brands and wholesale distribution business. Over the long run, this approach should lead to sustainable high margins. Cresco hasn't forsaken the retail market, though. It operates 20 retail stores now and has another nine retail licenses.
I expect the legalization of recreational marijuana in New Jersey and Arizona will present significant growth opportunities for Cresco. Marijuana decriminalization at the federal level (which now seems likely) would also provide a huge catalyst for Cresco, paving the way for the company to list its shares on a major U.S. stock exchange. I suspect that most pure-play U.S. pot stocks will perform well in 2021, but I'm especially bullish about Cresco.
2. Innovative Industrial Properties
To be honest, I hesitated before including Innovative Industrial Properties (NYSE:IIPR) on this list. Why? If legislation passes to make traditional banking services more readily available to U.S. cannabis companies, it could spur more competition for IIP.
IIP is a real estate investment trust (REIT) that buys properties from medical cannabis operators then leases those properties back to the operators. It's a great way for medical cannabis companies to raise cash. Banking reform, however, would open up other avenues for these companies to obtain growth capital. IIP could have to lower its lease rates to be competitive.
With this potential headwind, it might seem strange to pick IIP as a top marijuana stock for 2021. My view, however, is that the company's business model is simply too strong to ignore. REITs are very successful in other industries that don't have any banking restrictions. I suspect IIP will continue to grow robustly even with the prospects of changing dynamics in the medical cannabis industry.
I wrote before the Democrats' sweep of the Georgia Senate run-offs that IIP was the dividend stock most likely to double in 2021. My view hasn't changed.
I could have easily included pretty much any of Cresco's peers on this list. Instead, I went with arguably the most attractive ancillary cannabis stock -- GrowGeneration (NASDAQ:GRWG).
In some ways, the likelihood of federal marijuana reform won't impact GrowGeneration very much. The company's shares already trade on the Nasdaq. GrowGeneration can already access traditional banking services. And it's already growing rapidly in states where cannabis is legal.
However, I still think federal changes to cannabis laws will be positive for GrowGeneration. Marijuana decriminalization and banking reform could spark a green wave as more companies jump into the market. That would be great for GrowGeneration as a premier retailer of hydroponics and organic gardening products.
This niche retail market is an obvious candidate for consolidation. GrowGeneration is the biggest hydroponics retailer but only has 39 stores in 11 states. There are around 1,000 hydroponics stores in the U.S. I fully expect GrowGeneration to significantly expand its retail presence in 2021 and deliver another year of tremendous gains.