You'll hear a lot about pot stocks to trade for short-term profits. And if your timing is really good, you can potentially make money on such quick in-and-out moves. But if your timing isn't so great, you can also get burned.
There's another way to build wealth with cannabis stocks, though. Instead of trading for the short term, find stocks of well-run companies with great growth prospects and stick with them over the long term. Here are three cannabis stocks to buy and hold that should provide tremendous returns over the next several years.
1. Cresco Labs
Cresco Labs (CRLBF 1.10%) ranks as one of the top multistate cannabis operators in the U.S. The company operates retail stores in nine states that together comprise 60% of the current addressable market. It's also the largest wholesaler of branded cannabis products in the country.
If you threw a dart at a list of popular cannabis companies, the odds are that your dart will land on one that's unprofitable. It probably won't even generate positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Cresco, though, is an exception. The company is already profitable and delivered adjusted EBITDA of $46.4 million in its latest reported quarter -- up 182% sequentially.
Cresco's growth prospects are clear and compelling. Its current markets continue to expand, even the relatively mature market in California. The company is also moving into new markets, recently announcing an acquisition that will make Cresco a competitor in Florida's fast-growing medical cannabis market.
The stock could also be poised for a big jump if marijuana is decriminalized in the U.S. Cresco's shares can't be listed on major U.S. stock exchanges as long as cannabis remains illegal at the federal level. That restriction is holding the company's valuation back when compared to its Canadian peers.
GrowGeneration (GRWG 10.90%) is the largest specialty retailer focusing on hydroponics and organic gardening. With its recently announced acquisition of San Diego Hydroponics & Organics, the company operates 50 stores in 11 states.
The company expects 2020 revenue of $192 million, up 140% year over year. It looks for 2021 revenue of between $335 million and $350 million. The midpoint of that range reflects growth of 78%. GrowGeneration also anticipates adjusted EBITDA this year of between $38 million and $40 million.
There are two primary paths for growth for the company. It can (and almost certainly will) grow organically. Several of the markets where GrowGeneration currently operates are only in their early stages. As more cannabis producers enter these markets, it will drive demand for the hydroponics and organic gardening products that the company's stores carry.
An even bigger opportunity for GrowGeneration, though, is to add more stores. There are over 1,000 specialty hydroponics stores in the U.S. GrowGeneration should be able to further consolidate this highly fragmented market through acquisitions, giving the company a significant growth runway.
3. Innovative Industrial Properties
Innovative Industrial Properties (IIPR -3.84%) could offer the best way for more conservative investors to profit from the cannabis boom. The company is the leading real estate investment trust (REIT) that focuses on the U.S. medical cannabis industry. It currently owns and leases 67 properties in 17 states.
In the fourth quarter, IIP's revenue totaled $37.1 million -- a 110% year-over-year jump. Its earnings soared 120% year over year to $21 million.
Unlike most cannabis stocks, IIP offers a dividend. Its dividend yield currently stands at nearly 2.3%. The company increased its dividend payout by 58% last year.
All IIP needs to do to continue its impressive growth is to keep leasing out properties to medical cannabis operators. The company added 22 properties to its portfolio between Jan. 1, 2020, and Feb. 24, 2021. While the potential for federal cannabis reform could increase competition for IIP, it should still be able to deliver strong growth going forward.