We know that the early publicly traded cannabis stocks shot higher on the enthusiasm for marijuana's potential, only to fall back to earth when the promised riches failed to materialize.
Even though the legal cannabis market holds enormous value and the possibility for much greater rewards, most marijuana stocks seem to offer just as much risk -- if not more -- than those early players. Yet there's good reason to believe that Cresco Labs (CRLBF 0.81%), Innovative Industrial Properties (IIPR -1.55%), and Columbia Care (CCHWF 2.91%) are the best of all possible worlds: low-risk, high-reward pot stocks. Here's why.
A laboratory of growth
Eric Volkman (Cresco Labs): $1,000 sure buys a lot of Cresco Labs, which is a more than worthwhile stock to own a pile of. It's a double-threat of a company, as it's equally active in both the retail and wholesale markets (in fact it says it's the No. 1 wholesaler in the U.S.). This profile makes it stand out among the numerous multi-state operators (MSOs) on the stock market.
Both segments are very much on the rise, to the point where they notched new records in Cresco's Q2. Retail brought in $101 million, for a 22% sequential improvement and a 158% year-over-year increase. Those numbers for wholesale were a respective $109 million, 14%, and 98%.
On the retail side, Cresco isn't an expand-at-all-costs operator scattered throughout the U.S. Rather it's quite strategic, planting its flag firmly in either wide-open markets or limited-license ones, most of which are populous states. The seven states in which it's opened its Sunnyside dispensary cover the former category well, with the brand serving Illinois and Massachusetts.
More encouragingly for future development, though, Cresco has established a presence in both upstate and downstate New York. Cresco's four Sunnysides are evenly split between the two geographies. New York recently legalized recreational marijuana and that product segment is sure to take off once its market is properly established.
Speaking of populous states, Pennsylvania is the site of five Cresco dispensaries. The state hasn't yet legalized recreational marijuana, but especially with nearby New York and New Jersey doing so, it's only a matter of time. Over 13 million people call Pennsylvania home, so with its foothold in the state the company is in a fine position to benefit handsomely.
Meanwhile, Cresco is nearly doubling there, adding another three dispensaries with September's $90 million cash-and-stock deal for retailer Cure Pennsylvania.
Cresco is already sprouting some healthy plants from these roots. Unusually for a marijuana company, it's been profitable -- booking a small net income of $2.7 million in Q2 and reversing a streak of losses. The company's cash and equivalents were down only slightly from end-2020 levels at a shade over $131 million, leaving some gas in the tank for more acquisitions.
I like Cresco for its strength in both the retail and wholesale segments, and I'm particularly fond of its surgical strike method of choosing high-potential states in which to operate. This stock is a fine, inexpensive buy for anyone bullish on the future of U.S. weed.
Cannabis real estate is stable and lucrative
Alex Carchidi (Innovative Industrial Properties): When it comes to business models that scream safety, the first thing in my mind is any business that's predominantly about collecting rents. And that's why Innovative Industrial Properties is one of my favorite cannabis stocks. Whereas some cannabis companies sell the plant themselves, IIP is a real estate investment trust (REIT) that makes its money from leasing floorspace at its marijuana retailing, processing, and cultivation facilities to aspiring growers.
But building up a portfolio of highly specialized real estate isn't free, and finding and retaining creditworthy tenants can be a significant problem. Innovative Industrial's win-win solution is to buy floorspace from marijuana companies that need immediate cash to grow, then lease the same property right back to them in what's called a sale-leaseback transaction. So, tenants get to keep working in their space and they also get the cash to expand their business, whereas IIP gets ownership of the location as well as a monthly rent check.
What makes Innovative Industrial a safe stock to buy? In short, it's safe because its tenants sign multi-year lease agreements ranging from 10 to 20-year durations that they definitely have the cash to pay back, at least at the start of the contract. Plus, annual rent increases are baked into the lease, so investors can expect growth even in the absence of new sale-leasebacks. If tenants end up going out of business, the bill they'll need to be paying until the very last day will be for the rent. And another measure of safety is that the properties are 100% occupied because the prior owners are the tenants, so there's no delay in getting a new facility rented out.
Finally, IIP pays a dividend that has grown by more than double in the last few years, indicating that its financial position is quite strong. Though its yield of 2.26% isn't very high, IIP plans to keep hiking its payment alongside its ever-rising revenue. And, so long as its tenants are paying, Innovative Industrial will keep accumulating cash that it can spend on executing more sale-leasebacks with new tenants to keep growing its top line and roster of properties.
Getting big in the states that matter
Rich Duprey (Columbia Care): One of the largest vertically integrated MSOs around, Columbia Care has 99 dispensaries in 17 states, with 31 cultivation and manufacturing facilities operating alongside its wholesale distribution business in 13 markets. Moreover, it's licensed to operate in 18 of the 36 states that have legalized marijuana for either personal or medicinal use, but it likes to target limited-license states, or those states that limit competition by doling out very few licenses.
While it's a lousy way to regulate the marijuana industry because it increases costs for users, it gives the handful of players like Columbia Care that are allowed to operate in those states a clear competitive advantage. It also helps explain why Columbia Care is profitable on an adjusted basis despite pursuing an ambitious plan to get to scale as quickly as possible.
The MSO has made a number of acquisitions lately, including vertically integrated medical marijuana company Green Leaf Medical; CannAscend, a four-dispensary operation focused on Ohio; and Project Cannabis, a California-based cultivator, wholesaler, and retailer. It also just entered Virginia's new medical marijuana market with some of Old Dominion's first whole-flower sales for patients under its Seed & Strain and gLeaf brands.
That's key because Columbia Care expects Virginia will expand sales to personal and recreational use in the future, and it says revenue tends to triple or even quadruple when conditions for usage are expanded. Since twice as many states allow medical use as recreational consumption there is enormous potential for further profitable growth.
Columbia Care is forecast to see full-year sales launch into stratospheric growth from $179.5 million in 2020 to $1.449 billion by 2024, an eightfold increase. An investment now is a pretty low-risk way to capitalize on this MSO's potential.