Most cannabis companies have seen their shares drop so far this year, as lowered profits, the slowed pace of legalization, and expectations have scared investors off. The AdvisorShares Pure Cannabis ETF is down more than 49% this year, while the ETFMG Alternative Harvest ETF has fallen more than 39%.
NewLake Capital Partners (NLCP 0.82%), Cannacord Genuity Group (CCORF 1.71%) and Trulieve Cannabis (TCNNF 0.41%) have not been immune to investors' concerns, and their shares have fallen as well, even though all three are financially strong enough to last until the cycle for cannabis investing swings back in their favor.
NewLake is small but growing fast
NewLake Capital Partners is the new kid on the cannabis real estate investment trust (REIT) block. It just had its IPO last August, and its market cap of $455 million is overshadowed by the $3.82 billion market cap of Innovative Industrial Properties, its main competitor. Both REITs specialize in lease-backs to cannabis companies, where they provide capital to cannabis operators by buying cultivation and retail properties, then renting them back to cannabis companies with triple-net leases that put most maintenance expenses on the tenants.
In the first quarter, NewLake reported $10.2 million in revenue, up 13% sequentially. Net income was listed as $5 million, up from $4.3 million in the prior quarter. More importantly, the company continues to grow funds from operations (FFO) and said that in Q1 it had $7.7 million of FFO, up 16.2% sequentially. Adjusted FFO (AFFO) was $8.1 million, up 15.7% over the fourth quarter of 2021.
NewLake said it expects full-year revenue between $42 million and $44 million, compared to the $28.2 million it reported in 2021. The company has 29 properties that are 100% leased and have an average lease term remaining of 14.3 years.
NewLake's stock is down more than 28% so far this year, but its fundamentals are strong enough that it makes sense to buy the stock while it's at a discount -- particularly because the company just raised its dividend by 29% to $0.33 per quarterly share, offering a yield of about 6.44%. The dividend appears safe as the company has a target of 80% to 90% of AFFO payout ratio, considered safe for a REIT.
Cannacord Genuity crucial to cannabis businesses
Cannacord Genuity is a global investment bank that offers wealth management, brokerage, and investment services to retail, institutional, and corporate clients. It isn't a pure-play cannabis stock, but it frequently represents mergers and acquisitions (M&A) in cannabis.
Cannacord has had five consecutive years of increased revenue and three consecutive years of increased net income. However, it slumped in Q1, with $491 million in revenue, down 29.1% year over year, and $0.52 in earnings per share, down 56.7% from the same period last year. The drop has led to the stock's falling by more than 28% this year.
It may seem counterintuitive, but I think right now is a good time to buy the stock for several reasons. It has a price-to-earnings ratio of around 4.95, well below what it should be considering the company's stability.
Mergers and acquisitions in the cannabis industry are also not likely to slow down. More profitable and better-funded companies are consolidating licenses by buying out struggling cannabis companies. According to research by Cannabiz Media, of the 137 cannabis M&A deals it found over the past two years, Cannacord led with 22 deals, and was tops in representing the sellers and buyers.
Even if cannabis company mergers slowed, that's just a small part of Cannacord's business. It's one of the most profitable wealth management companies in Canada, with an operating margin (trailing 12 months) of 20.39%, and it has a low debt-to-equity ratio of 0.095.
Cannacord also offers something most cannabis companies don't -- a quarterly dividend. It raised its dividend by 22% this year to $0.085 per share, representing a yield of 3.2%, with a very safe cash dividend payout ratio of 12.88%.
Trulieve will be a cannabis survivor
Trulieve, based mostly in Florida but with dispensaries in 11 states as of Q1, leads all other cannabis retailers in revenue. The company reported Q1 revenue of $318.3 million, over $5 million more than Curaleaf, the second-largest company in revenue rankings.
Despite its size, Trulieve continues to show consistent growth. Its quarterly revenue was up 64% year over year and 4% sequentially. It also improved gross margin to 56%, up from 43.4% in Q4 2021.
The only concern about Trulieve is that, as it has expanded through acquisitions and new retail dispensary openings to 165 stores, it's gone from being a profitable company to one that's losing money. In Q1, it had a net loss of $32 million, up 55% from the prior quarter, but down from the $30 million in net income it reported in Q1 2021. Much of that can be chalked up to the $17.2 million in charges associated with its purchase of Harvest Health & Recreation last year.
That drop in net income is a big reason why the stock has plummeted more than 46% so far this year. This provides a better entry point for investors, however, as Trulieve is as prepared as any cannabis company to remain a major player in the industry. Last month, company insiders bought 31,650 shares of Trulieve stock, taking advantage of the bargain price, for now.
Looking at its adjusted EBITDA of $105.5 million, an improvement from $100.9 million in the fourth quarter, the company appears to be making strides to get back to profitability.
Trulieve also reiterated 2022 guidance with expected revenue in the range of $1.3 billion to $1.4 billion and adjusted EBITDA in the range of $450 million to $500 million. That compares to revenue of $938.4 million and adjusted EBITDA of $384.6 million last year.
Don't wait too long
All three of these cannabis companies are too healthy to see their shares wallow for long. Trulieve, once it absorbs its Harvest acquisition, will likely see increased margins that will bring it back to profitability. NewLake Capital Partners is really just beginning its runway, so I see a lot of opportunity there. Cannacord has enough geographic and revenue diversity to bounce back quickly. The latter two stocks also offer a dividend to reward long-term investors.
