A lot has changed since the connection between 420 and cannabis took root in 1971. Today, cannabis is legal throughout much of the U.S. and is legal at the national level in Canada.
Cannabis has also become a big opportunity for investors. But some alternatives are much better than others. Here are my picks for the four best cannabis stocks to buy on this 420 Day.
Image source: Getty Images.
1. Innovative Industrial Properties
I think that Innovative Industrial Properties (IIPR 0.37%) belongs in a league of its own among cannabis stocks. The company is organized as a real estate investment trust (REIT) and focuses exclusively on the regulated cannabis market in the U.S.
IIP is highly profitable. Its earnings soared 75% last year to $112.6 million. Likewise, IIP's adjusted funds from operations (FFO) also jumped 75% to $175 million.
The company's business model is simple and repeatable. IIP specializes in sale-leaseback transactions. Cannabis operators sell their properties to IIP and then lease the properties from IIP. The operators receive an influx of cash to fund operations. IIP receives steady long-term cash flow.
IIP currently owns 108 properties in 19 states. Its tenants include several leaders in the U.S. cannabis industry. The cannabis markets in the states where it currently operates continue to expand. There are also another 18 states that have legalized medical cannabis where IIP doesn't own properties. The company should be able to continue delivering strong growth for years to come.
2. Cresco Labs
Cresco Labs (CRLBF -4.76%) stands out as one of the cannabis leaders that lease from IIP. The company currently operates in 10 states. It owns 49 dispensaries and ranks as the No. 1 wholesaler of cannabis products in the U.S.
The biggest knock against Cresco is that it's not consistently profitable yet. However, the company has made significant improvement on its bottom line. And in its latest quarter, Cresco delivered adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $57 million, more than tripling year over year.
Cresco is poised to soon become the biggest U.S. multistate cannabis operator based on revenue. The company plans to acquire Columbia Care for $2 billion. This deal will give Cresco more than 130 retail stores in 18 markets -- including all of the top 10 largest and fastest-growing cannabis markets.
The stock is attractively valued as well. Cresco's shares trade at 1.72 times trailing-12-month sales and only 1.13 times expected sales once the Columbia Care acquisition is finalized.
3. Village Farms
I wouldn't touch most Canadian cannabis stocks with a 10-foot pole. However, Village Farms (VFF 8.13%) stands out as a notable exception.
For one thing, Village Farms is profitable -- something that most of its Canadian peers can only dream about. Its cannabis business has also delivered 13 consecutive quarters of positive adjusted EBITDA.
Village Farms' Pure Sunfarms brand ranks No. 1 in dried cannabis sales in Ontario, Alberta, and British Columbia. The company should improve its position in Quebec thanks to purchasing a 70% stake in Rose Lifescience.
It also has solid opportunities outside of Canada. Pure Sunfarms recently won European Union Good Manufacturing Practices (GMP) certification. This is a key prerequisite for the company to begin shipping medical cannabis to EU countries. Village Farms also sells hemp-based products in the U.S. and is in a good position to enter the U.S. cannabis market when federally permissible.
4. Ayr Wellness
Ayr Wellness (AYRW.F -5.67%) is the worst-performing cannabis stock on the list. Its shares have plunged more than 60% over the past 12 months. However, I think that Ayr will rebound sharply in the future.
The company's underlying business remains strong. Ayr reported revenue of $111.8 million the fourth quarter of 2021, a year-over-year jump of nearly 134%. It also posted a tidy profit of $23.8 million, although the total was boosted by a fair value gain on financial liabilities.
Ayr expects only flat growth in the first half of 2022. But that doesn't concern me. This anticipated sluggishness is due to the company's previous construction delays and some uncertain timelines for winning regulatory approvals in Massachusetts and New Jersey. I think these are only temporary issues.
Analysts project that Ayr's shares could skyrocket more than 150% over the next 12 months. I don't know if the stock will deliver that impressive a gain. However, I like Ayr's long-term prospects. And I really like its valuation, with shares trading at only 6.5 times expected earnings and 1.8 times sales.
