Some marijuana stocks seem to have already passed their peaks; others are expected to come into their own in due time. Below are three cannabis stocks that not only have good long-term prospects, but should also do well (or continue doing well) for the next year or so.
Investors should always have a long time horizon for their portfolio, not investing money they'll need within the next three to five years, and planning on holding onto stocks for a decade or more. But we all want to see the stocks we buy provide us a nice return much sooner than that. Three Fool contributors believe GrowGeneration (GRWG -3.21%), AFC Gamma (AFCG 0.19%), and Innovative Industrial Properties (IIPR -1.55%) are poised to make you richer through 2022 and beyond.
Picks, shovels, and profits
Eric Volkman (GrowGeneration): There aren't many pick-and-shovel stocks associated with the marijuana industry, which is only one of several reasons to buy GrowGeneration. The company is a retailer of hydroponic goods, i.e., products that can be used to grow crops (like, say, marijuana) using a water-based system without the need for soil.
GrowGeneration stays true to its name by aggressively expanding through acquisitions of peer hydroponics retailers, which tend to be fairly small and not overly expensive. The company is a serial acquirer; on two successive days in August, for example, it announced purchases of two retailers, one based in Washington state and the other in Los Angeles.
The latter adds particular heft to the company, as shortly thereafter GrowGeneration opened two other facilities near that sunny Southern California metropolis. It described the pair as "the largest hydroponic garden centers in Los Angeles County," and they'll be well positioned to supply a strong and established regional marijuana market.
GrowGeneration's growth-by-expansion strategy coincides with greater legalization the U.S., as more states flip the switch on either medical or recreational marijuana. Earlier this year both New York and New Jersey made recreational pot legal, and GrowGeneration is sure to target such newcomers for store locations -- as it did recently in Massachusetts by acquiring a store called Aquarius Hydroponics.
The company's expanding presence, combined with organic growth in a rising industry, has really juiced GrowGeneration's results. In its second quarter revenue increased 190% on a year-over-year basis (to nearly $126 million), fueled by same-store sales that improved by 60%.
And like a good pick-and-shovel company, GrowGeneration is profitable (this, while many marijuana sector peers continue to post losses). That quarter's net income was $6.7 million, a big improvement over the previous year's result -- which happened to be another profit, of almost $2.6 million. In fact, the company has landed in the black consistently for over a year.
Several months ago, GrowGeneration was a hot stock for these reasons. It's since lost some of its luster, as decriminalization/legalization efforts on both the state and federal levels in the U.S. have stalled. What also didn't help was the company's relatively cautious guidance for full-year 2021.
But there is very wide public support for marijuana law liberalization. Also, the factors behind that muted guidance (inflation affecting build-out activities, slow-walk licensing in newly recreation-legal states) are only potential short-term drags on operations. Past this year, the view looks extremely good for GrowGeneration's business, and its beaten-down stock is irresistibly cheap to own now.
This company gets paid to help others grow
Alex Carchidi (AFC Gamma): Because cannabis isn't yet federally legalized in the U.S., it can be tough for marijuana businesses to get the capital they need to grow. That's where Advanced Flower Capital (AFC) Gamma comes into play. The company issues loans to cannabis companies that can't find financing elsewhere, using their real estate as collateral to secure the loan. Then, it returns investors' capital by paying a dividend.
The important thing to recognize about AFC is that it's closer to being a real estate investment trust than a traditional cannabis company. In the last quarter alone, it inked new deals worth $119.2 million, and it still has around $855 million in potential loans waiting in the wings. Management aims to originate new loans with gross yields from 12% to 20%, and all of its outstanding loans reach maturity by mid-2026. Assuming those prospective loans yield at management's lower target and all of them end up being disbursed, the company could eventually see as much as $102.6 million in interest revenue alone.
As long as the regulations surrounding investment banking for the cannabis industry remain strict, AFC will have a steady clientele. Because income from its secured loans is highly reliable, AFC's dividend is quite secure. The stock currently has a forward dividend yield that's pushing 8%, which means that it could be a great way to supplement the cash flow from your portfolio.
What's more, AFC recently raised its dividend by 13.2%, and more increases may be on the way as its loan book expands over time. Of course, to do that, it might need to issue new stock -- or it might just rely on the compounding returns from its loans.
A pot stock that wins no matter what
Rich Duprey (Innovative Industrial Properties): You have to admire Innovative Industrial Properties' position when it comes to marijuana stocks that ought to be able to profit for years to come regardless of whether marijuana is legalized at the federal level. In fact, it's empowered by marijuana's current legal status.
As a real estate investment trust, Innovative Industrial is a source of financing to cash-strapped pot companies that are closed off to traditional sources of money. Through its sale-leaseback program, the medical marijuana REIT acquires cultivation and processing facilities in exchange for cash under long-term leases (the average is nearly 17 years). It then bills the cannabis companies annual rent increases and collects property management fees.
If pot is legalized federally, Innovative Industrial still is in the catbird seat. First, those long-term leases ensure it will have a steady stream of revenue for years to come, plus it has already established relationships with some of the biggest multi-state operators in the industry that won't readily abandon the arrangement even if they could.
Just look how well casino REITs perform as they give resort operators access to cash without the headache of owning and managing the property. Casino companies can focus on what they do best -- running a casino -- and the same goes for pot companies: They'll be able to focus on their strengths of producing high-quality marijuana.
Smaller pot stocks, even if they're able to access traditional financing channels, will still have greater financial needs than banks will be able to meet. An arrangement with Innovative Industrial is still in their best interests.
Investors can be financially rewarded for sticking by the REIT. Like REITs in other industries, Innovative Industrial is required to return at least 90% of its profits to shareholders as dividends. It has increased the payout 11 times since going public in 2016, and it has quadrupled in value.
The dividend of $5.60 per share currently yields 2.4% annually, greater than the S&P 500's current average of 1.3%. In short, Innovative Industrial Properties is easily a stock that can make you richer through 2022 and beyond.