It's been a brutally tough bear market for cannabis investors. Shares of the AdvisorShares Pure US Cannabis ETF have collapsed by more than 72% over the last 12 months, and there's no relief in sight thanks to a return-destroying toxic sludge of inflation, rising interest rates, fears of a recession, and a general distaste for growth stocks of all stripes.
In such an environment, investors need to be smart -- and that means thinking about buying shares of businesses that aren't subject to the same headwinds as others in the industry. Let's examine a pair of pot stocks that are capable of growing even in the face of external conditions that can seem a bit pessimistic.
OTC: NLCP
Key Data Points
1. New Lake Capital Partners
As a real estate investment trust (REIT), New Lake Capital Partners (NLCP +4.20%) isn't an everyday marijuana stock because it'll never need to sell a single nugget of cannabis to deliver for its shareholders. Instead, it does sale leaseback transactions where it trades cash in exchange for cultivation and retail properties, which it then leases back to the seller to create a rental income stream. In short, New Lake is a smart cannabis stock because it's profitably trading the shovels competitors need today for more valuable and longer-lived assets during the industry's gold rush.
Its holdings span 11 states, and it focuses its search for favorable transactions by looking at areas where the number of marijuana cultivation, distribution, or retail licenses are limited. That ensures its tenants have a competitive landscape, which is more likely to lead to their success, thereby reducing the risk of them defaulting on rent. Around 94% of its renters report positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which also helps.
On July 6, with a trio of new purchases in Pennsylvania and Nevada worth $50 million, New Lake announced that it spent all of the money it raised during its initial public offering (IPO). That'll help to hit management's goal of making $42 to $44 million in revenue this year. And it will also support the company's dividend hikes, too. Right now, its forward dividend yield is in excess of a juicy 7.6%, and its base payout has increased by 191.7% over the last 12 months.
While it might not beat the market anytime soon thanks to gloomy sentiment surrounding cannabis stocks, New Lake is very much at the start of its growth journey. Though it may soon need to raise more funds to finance purchases beyond what its $30 million revolving credit facility will allow, investors who buy shares will likely benefit from years of its expansion alongside the market for weed.
2. 22nd Century Group
NASDAQ: XXII
Key Data Points
22nd Century Group (XXII 0.98%) is a biotech that creates genetically engineered strains of marijuana plants that produce economically valuable psychoactive chemicals in larger quantities than wild type plants would. Plus, it does the same for other cash crops like tobacco and hops, and it even makes low-nicotine cigarettes to boot. While 22nd Century isn't yet profitable, its diversified offerings mean that a pullback in any one of its segments is unlikely to cause lasting harm to its top line. But its real value is that it can help other businesses make more money by increasing the yield from their plants through licensing out its bioengineered strains or designing new ones for a fee.
There's something for most pure-play weed companies in 22nd Century's lineup. It can create blight-resistant and pest-resistant plants, enrich or reduce the production of specific psychoactive molecules, and even calibrate the aromatic molecules that give marijuana its distinctive smell (or remove them altogether). Especially in an industry like cannabis, where maintaining positive profit margins is an ongoing and endemic struggle, tweaking plant genetics could be invaluable.
At the moment, 22nd Century's low-nicotine cigarettes are driving the most growth, with its trailing-12-month revenue nearly reaching $33.2 million, and its quarterly revenue rising by 32.9% year over year. With the Biden administration's recent signal that it would move to propose a new rule limiting the total amount of nicotine in cigarettes within the next few years, it's possible that its revenue will go parabolic from direct sales to consumers, or via licensing its cultivars to other tobacco companies. Still, even without that regulatory gift, 22nd Century is going to be a key upstream enabler of growth in the marijuana industry, and that's why it's a smart stock to buy before it gets more widely discovered.
