The growth in legal marijuana in the United States provides a great long-term opportunity for investors. It is expected to go from a market of just over $35 billion in 2022 to a $61 billion market, with a compound annual growth rate (CAGR) of more than 16%, according to cannabis industry analyst BDSA.
The problem is figuring out, amid a lot of cannabis carnage this year, which are some of the better long-term buys in the industry. Overall, trends have been down, with the ETFMG Alternative Harvest ETF and the AdvisorShares Pure Cannabis ETF down more than 56% and 66%, respectively, so far this year.
Three cannabis companies that I believe are well-situated to survive and eventually thrive are Jazz Pharmaceuticals (JAZZ -0.82%), Trulieve Cannabis (TCNNF -6.26%), and AFC Gamma, Inc. (AFCG -0.68%).
1. Cannabis-related therapies are just part of Jazz Pharmaceuticals
Jazz Pharmaceuticals has two cannabis-derived therapies among its marketed drugs. As such, it presents much less risk than a pure-play cannabis company as it isn't facing the same competitive pressures and regulatory concerns.
Most of the company's business is based on oncology and neuroscience therapies. Its main cannabis-related drug, Epidiolex, is used to treat seizures for Lennox-Gastaut syndrome, Dravet syndrome, and tuberous sclerosis complex, all variations of epileptic conditions. Jazz also markets Sativex (nabiximols) in Europe to treat spastic episodes from multiple sclerosis. Epidiolex brought in $175.3 million in second-quarter revenue, up 12% year over year.
Jazz's shares are up more than 8% so far this year as it is showing improved earnings. Through six months, it reported revenue of $1.746 billion, up 28% over the same period last year, and it had earnings per share (EPS) of $0.57, compared to an EPS loss of $4.17 through the first six months of 2021.
The company appears to be on track for its plan of generating $5 billion annually in revenue by 2025. Its biggest growth drivers are the company's oxybate drugs, Xywav and Xyrem, used to treat narcolepsy and a related condition, idiopathic hypersomnia. The pair brought in a combined $504.4 million in revenue in the quarter, up 10%, year over year.
2. Trulieve is adjusting well to Harvest Health and Recreation purchase
Most of the news regarding Trulieve has been negative this year. The multi-state cannabis operator's shares are down more than 66%, and the company, facing inflationary pressures, trimmed its yearly guidance from earlier estimates. All of that obscures the company's obvious continued growth, as it is setting itself up to be one of the top U.S. cannabis companies, now and in the future. It is the largest retailer in Florida, Pennsylvania, and Arizona, all of which are limited-license states.
The company has 177 dispensaries across nine states and soon will be adding five medical-use dispensaries in Georgia, just over the border from where it dominates the Florida market. The company has had 18 consecutive quarters of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
In the second quarter, Trulieve boosted revenue by a reported 49%, year over year, to $320.3 million. The company had a net income loss of $22.5 million, but that was down from a loss of $30.2 in the prior quarter and $70.5 the quarter before that. Most of the losses in the quarter are one-time impairments stemming from changes due to the company's $2.1-billion purchase of Harvest Health and Recreation that it completed in October of 2021.
3. AFC Gamma's dividend is too good to ignore
AFC Gamma's shares are down more than 28% so far this year, despite improved financials, but that decline is made more palatable by the company's dividend, which offers a current yield of around 13.7%. The company provides loans to cannabis companies. It is an unusual company as a mortgage real estate investment trust (mREIT) in that it doesn't own or lease out property but has the potential to do so because it uses cannabis companies' properties as collateral.
There's plenty of opportunity for AFC Gamma because institutional banks generally decline to provide full services to marijuana-related companies due to federal laws regarding marijuana. If the SAFE Banking Act is ever passed, that would bring more competition to AFC Gamma, but it should still benefit from its first-mover status going forward.
The company increased its dividend in the second quarter by 30.2%, year over year, to $0.56 per quarterly share, the fourth consecutive time the company increased its dividend (though it is keeping it the same in the third quarter), leaving it with a payout ratio of 81% of distributable earnings per share to dividend per share, considered well within the safety window for a REIT.
In the second quarter, AFC Gamma reported net interest income from its loans of $19.9 million, up 128%, year over year, with distributable earnings of $13.6, up 135% over the same period in 2021.
