Marijuana presents a once-in-a-lifetime opportunity because it is an emerging industry with plenty of growth ahead. The question for investors, though, is which marijuana stocks are the best to buy and hold for the long term.
Pot investors should seek stocks with strong records of earnings growth that are likely to take off as more states legalize cannabis. And keep an eye on any moves the federal government makes toward full legalization. Three marijuana stocks that fit the bill are Curaleaf (CURLF -0.99%), Trulieve Cannabis (TCNNF -1.58%) and Innovative Industrial Properties (IIPR 0.93%).
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Curaleaf making the most of its size
At last count, Curaleaf operates 109 dispensaries across 23 states. The stock is down more than 9% for the year despite steadily improving revenue.
The company has grown revenue every year since its founding in 2010 and continued that trend in the second quarter. It reported quarterly revenue of $312 million, up 166% year over year and 20% sequentially, topping other multi-state marijuana operators. Curaleaf isn't profitable yet, losing $9.7 million in the second quarter, compared to a net loss of $17.2 million in the same quarter in 2020 and a net loss of $1.8 million in the first quarter of 2021. However, it is moving toward profitability by recording its ninth consecutive quarter of positive adjusted EBITDA -- hitting a record $84 million, which is up 201% from Q2 2020 and up 35% sequentially.
The company is number one in market share in New York, Vermont, and North Dakota, and number two in Florida, Oregon, and Arizona. It's the only multi-state operator to have much of a presence in Europe, thanks to its April purchase of EMMAC Life Sciences Limited for $50 million and 17.5 million Curaleaf shares. The company renamed EMMAC to Curaleaf International and operates in the United Kingdom, Germany, Italy, Spain, and Portugal.
Trulieve's temporary troubles provide an entry point
Florida-based multi-state operator Trulieve was on a winning streak until some publicity troubles began casting a cloud over the company. J.T. Burnette, the husband of Trulieve CEO Kim Rivers, was found guilty last month of several corruptiom charges including extortion and fraud. The stock is down more than 23% this year and more than 33% over the past three months. While this news has dampened investors' enthusiasm for Trulieve, it has little impact on the company's growth possibilities.
Trulieve just opened its 100th dispensary, and its recent purchase of Harvest Health & Recreation could make it the top cannabis company by revenue. Trulieve said it will have 145 dispensaries after the acquisition of Harvest Health is complete.
In the second quarter, Trulieve reported revenue of $215.1 million, up 11% sequentially and 78% year over year. One of the few cannabis companies that are already profitable, the company had a net income of $40.9 million, up 36% sequentially and 116% over the same period in 2020, and its 14th consecutive quarter of profitability. The company said it had adjusted EBITDA of $94.9 million, up 4% sequentially and 55% year over year.
Trulieve first concentrated on becoming the dominant company in Florida. The company is now using that same methodology to make inroads in Arizona, Pennsylvania, and Georgia. Trulieve has more than 700 products and has focused on the marketing of local brands to build trust with consumers.
The legal difficulties of the CEO's husband, while bad public relations for the company, open the door for investors to get in on a growth stock, with a low price-to-earnings (P/E) ratio. Many cannabis companies don't have P/E ratios because they aren't profitable -- but Trulieve is profitable, and its forward P/E is only 19.25, compared to Curaleaf's more typical 73.73.
Innovative Industrial Properties has big advantages
Innovative Industrial Properties' stock has risen more than 24% this year. There are several things that make Innovative a great long-term cannabis stock: relatively low risk, a high dividend, and a decent-sized moat for a business model.
The risk is low because, unlike the other two stocks, Innovative is a real estate investment trust (REIT) that doesn't deal directly with marijuana, so it has little to worry about in terms of federal or state laws regarding the sale of cannabis.
It is a REIT that buys and leases back properties to cannabis companies, offering immediate cash in return for long-term triple-net leases. This model produces steady funds from operations for IIP. While it is possible a cannabis client could have financial difficulties and not be able to pay rent, Innovative could easily turn around and rent the facility to another cannabis company. Ironically, the biggest risk to Innovative is the potential federal legalization of cannabis sales. That would lead to more traditional financing being opened to cannabis companies, so they may not need to sell their facilities to raise cash. However, that's still a long way off -- and even then, I think fledgling cannabis companies will still try to free up cash by selling their properties and entering a long-term lease.
Innovative's moat stems from its first-mover's status as a cannabis REIT. Since it started in 2016, the company has grown to 74 properties across 18 states, with a total of 6.8 million rentable square feet. Smaller REITs, such as AFC Gamma and Power REIT, have started to move in on what is a lucrative space, but those two companies' market caps combined are less than 10% of Innovative's $5.62 billion market cap. Innovative has a big edge in experience, name recognition, and funds.
In its second-quarter earnings report, the company reported adjusted funds from operation (AFFO) of $81.4 million through six months, compared to $38.8 million for the same period in 2020. Its six-month revenue was $91.7 million, compared to $45.4 million year over year.
Innovative just raised its quarterly dividend 32% to $1.40 a share, offering a yield of 2.45%. Since the company began offering a dividend in 2017, it has increased its dividend 833%. This is one of the biggest reasons that Innovative is a good long-term cannabis investment -- those dividends combine with the company's stock growth to provide a solid total return. The dividend is well-covered, with an AFFO-to-dividend-payout ratio of 85%, and the company says it plans to keep it within a range of 75% to 85%.
IIPR Revenue (Annual) data by YCharts
Making the best decision for the long haul
Of the three marijuana stocks, Curaleaf is having the most explosive growth. Thanks to its share price being down for the year, it presents a great entry point. Trulieve's deal to purchase Harvest Health will also fuel big-time growth and it looks like a better deal than Curaleaf because of the bad publicity.
Innovative Industrial Properties has more risk than the other two stocks in the long-term thanks to the possibility of federal legalization of marijuana, but I still see it having the least amount of short-term danger and the highest rate of total return.
