2 Top Cannabis Stocks to Buy for Spring 2021

Spring is here in the Northern Hemisphere -- and that means many gardeners and farmers have planting on their minds. For investors wanting to join the party and do some planting of cash in stocks, two stocks in the cannabis sector worth considering are Innovative Industrial Properties and Village Farms International. 

Overall, cannabis stocks are volatile and higher risk, so they are not a good fit for all investors. 

A cannabis strain with pink pistils. Image source: Getty Images.

Top cannabis stocks: Overview 

Data sources: YCharts. TTM = trailing 12 months. Data as of March 29, 2021. 

Innovative Industrial Properties: The least-risky cannabis pure play

When Innovative Industrial Properties (often called "IIP") went public in December 2016, it became the first publicly traded company to provide real estate capital to the medical-use cannabis industry. It's organized as a real estate investment trust (REIT).

IIP, which is based in San Diego, buys properties in U.S. states where medical marijuana is legal and leases them to state-licensed operators using long-term, triple-net leases. (Triple net means that tenants are responsible for paying property taxes, insurance, and maintenance.) It specializes in sale-leaseback transactions, primarily focusing on facilities used for growing and processing cannabis, though it also buys dispensaries. As of this writing, the company owned 68 fully leased properties in 18 states.

IIP has a long runway for growth. Currently, medical-use cannabis is legal in 36 states plus Washington, D.C., so the company has the potential to enter new states in addition to expanding in its current ones. Moreover, some of the states in which it already owns properties -- such as New Jersey -- have recently legalized marijuana for recreational use, which should significantly increase the size of the overall legal marijuana market in those states.

In 2020, IIP's revenue skyrocketed 162% year over year to $116.9 million, driven heavily by the acquisition of 20 new properties. Earnings per share and adjusted funds from operations (FFO) per share surged 61% and 53%, respectively. (FFO is a key profitability measure for REITs, and drives dividend changes.)

The main reason IIP is the least-risky (that does not equate to "safe") pure play on cannabis, in my opinion, is that it's profitable, while nearly all other cannabis companies are losing money. In addition, it pays a dividend. Indeed, REITs are required to pay out at least 90% of their taxable income each year as dividends to shareholders in return for their special tax treatment. In 2020, the company increased its dividend 58%. Currently, the stock is yielding about 3%.

The main risk for IIP? Once more traditional sources of providing capital (such as banks) open up to cannabis companies, IIP will face increased competition. These sources generally can't deal with companies that directly handle marijuana because the substance isn't legal on the federal level. 

Hemp field. Image source: Getty Images.

Village Farms: A small player with big potential

Village Farms has operations in its home base of British Columbia, Canada, and in Texas. While it only entered the cannabis business in 2017, it has 30 years of experience as one of the largest greenhouse growers of produce in North America. It has leveraged this experience to become the lowest-cost greenhouse producer of marijuana in Canada, according to the company.

Village Farms entered the marijuana-growing business via its Canadian Pure Sunfarms joint venture (JV) with Emerald Health Therapeutic. In November 2020, Pure Sunfarms became wholly owned by Village Farms, after Village Farms bought out its former partner.

In 2020, Pure Sunfarms was the top-selling brand of dried flower products at the Ontario Cannabis Store. The OCS has a legal monopoly over the legal sale of recreational cannabis products in Ontario, Canada's largest province by population. And Pure Sunfarms continues to roll out its branded cannabis 2.0 products. In February, it launched its first cannabis-infused edible products, gummies, which helped power the stock to a 34% gain that month. 

Village Farms also aims to become a major player in the U.S. hemp-derived cannabidiol (CBD) market. This market opened up on Jan. 1, 2019, following the passage of the U.S. Farm Bill, though the regulatory framework isn't yet fully clear. (CBD is a non-psychoactive chemical found in both marijuana and hemp that's been linked to some wellness benefits.) The company's moves in this space include the 2019 formation of two joint ventures for the outdoor cultivation of hemp and CBD extraction. It's also converting part of its massive Texas greenhouse into a hemp cultivation and CBD extraction facility.

The main risk for Village Farms? That it's competing against bigger companies with deeper pockets. But its experience advantage gives it a good shot at being a winner in a competition against the goliaths. Indeed, insiders seem to think so, too, as they own about 13% of the company, a relatively high percentage for a company with a $1 billion market cap.

In the fourth quarter of 2020, Village Farms' revenue jumped 43% year over year to $47.4 million. (Only about two months of Pure Sunfarms' sales are included in Village Farms' consolidated results, as Village Farms only wholly owned the cannabis subsidiary beginning on Nov. 2. Pure Sunfarms' October results, prorated for the portion owned by Village Farms at that time, are accounted for in a line item called "Equity earnings from unconsolidated entities.")

In Q4, Village Farms' net income landed at $7 million, or $0.12 per share, up from a net loss of $7.2 million, or $0.15 per share, in the year-ago period. 

Pure Sunfarms is powering Village Farms' overall results. In Q4, its net sales surged 86% to $17.3 million and it delivered its eighth consecutive quarter of positive net income (excluding a $3.3 million noncash charge related to its buyout of its former joint venture partner). This enabled Village Farms to deliver its ninth consecutive quarter of positive net income.

Village Farms has much potential, but its risk level is higher than IIP's, so invest accordingly.