Investing in marijuana stocks isn't for the risk-averse, but expanding legalization and improving sentiment toward this space has presented some intriguing opportunities for investors to consider. While marijuana usage is currently legal for medical purposes in 38 states and has achieved full legalization for both medical and recreational use in 19 states, the road to federal legalization may still have a ways to go.
Even so, for investors with the appropriate buy-and-hold attitude and a well-diversified basket of holdings, cannabis stocks can definitely have a place in your portfolio. If you're looking for the best marijuana stocks to buy and hold for the next several years or longer, here are three very different contenders you may want to consider.
Let's take a closer look.
1. Green Thumb Industries
Green Thumb Industries (GTBIF 1.58%) has its fingers in quite a few pies, with businesses spanning the medical-use and recreational cannabis space. It owns and operates a fast-growing family of marijuana brands including Beboe (cannabis vaporizer pens and edible pastilles), Dogwalkers (cannabis pre-rolls), Dr. Solomon's (medical cannabis products), Incredibles (you guessed it, edibles), and Rythm (a range of products including premium flower).
Green Thumb Industries also has a footprint of 77 retail stores selling both medical and recreational cannabis products, along with cultivation and manufacturing facilities around the country. Currently, it has operations in 15 U.S. states.
Green Thumb Industries has grown at a rapid clip over the last few years, adding 19 new retail locations between the second quarter of last year and this year alone.
Unlike many cannabis stocks, Green Thumb has maintained impressive revenue growth while also being profitable. Over the past three years alone, the company has boosted its annual revenue and net income by 61% and 403%, respectively.
In the most recent quarter, Green Thumb's revenue jumped 15% year over year. This was also the company's eighth consecutive quarter where net income was positive: Its bottom line rose 10% versus the year-ago period. Green Thumb Industries' track record of profitability, combined with its strong and consistent growth, make it well worth considering if you're looking to grant even a small position in your portfolio to the broader cannabis space.
2. GrowGeneration
For investors who prefer a more picks-and-shovels approach to investing in marijuana stocks, this next company might be worth considering. Unlike Green Thumb, GrowGeneration (GRWG 8.85%) isn't in the business of cultivating or even selling marijuana.
GrowGeneration is the company selling the essential tools and farming products that cannabis cultivators and brands need to get the plant from seed to consumer. From hydroponic systems to greenhouses to plant nutrients to extraction equipment, GrowGeneration sells it all.
As the biggest hydroponics supplier in the U.S. with more than 60 retail locations and counting, it shouldn't come as a surprise that demand for GrowGeneration's products has historically led to stunning top- and bottom-line growth. Over the trailing three-year period, the company has increased its annual revenue by 430%, while its annual net income has surged by a whopping 867%.
I say this to serve as a backdrop for the most recent quarter, in which net sales dropped by double digits, the company reported a steep net loss (compared to $6.7 million in net income it generated in the year-ago quarter), and management downgraded guidance. CEO Darren Lambert blamed "significant industry headwinds" and a "prolonged period of softer demand" for the poor performance.
Factors ranging from inflation to continued setbacks in broader marijuana legalization to excess supply in more entrenched cannabis markets are all elements of these particular headwinds. That said, GrowGeneration did generate nearly $4 billion in free cash flow in the quarter, and it had about $65.6 million in cash and short-term marketable securities on its balance sheet at the end of the period.
The recent quarters haven't been pretty, and patience will be necessary in the near term, but it could be very short-sighted for marijuana investors to overlook this business. While it's reasonable to expect that it will take time for these headwinds to abate, the products and services that GrowGeneration provides are on a scale unmatched in the marijuana space, and over the long term, demand isn't going anywhere.
3. Innovative Industrial Properties
The final pick on this list, Innovative Industrial Properties (IIPR 2.21%), is neither a cultivator of cannabis nor is it selling products that facilitate cultivation. This company is a real estate investment trust (REIT), which means it owns and operates facilities that it leases out to tenants.
The vast portfolio of properties this REIT owns are all cannabis cultivation, processing, and other industrial facilities. It leases them out only to state-licensed cannabis operators, with its tenants including well-known entities like Curaleaf, Cresco Labs, and Green Thumb Industries.
Innovative Industrial Properties' business model, which involves contracting tenants for lengthy multiyear leases that frequently span decades under the triple net lease structure, has enabled the company to generate consistently remarkable results. Over the last five years, IIP has grown its annual revenue by 1,300%, while net income and funds from operations have each increased by around 1,500%.
And since REITs are obligated to disburse at least 90% of their taxable income to shareholders as dividends, this growth has also resulted in a windfall for long-term investors. In fact, Innovative Industrial Properties' dividend has increased by an incredible 620% over the trailing-five-year period alone.
In the most recent quarter, the company added new properties to its portfolio in Maryland, Massachusetts, and Texas. Revenue was up 44% from the year-ago period while its earnings rose 37%.
Innovative Industrial Properties' predictable business model, diverse portfolio of tenants, and strong financial track record make for an unexpected but compelling investment to capitalize on the potential of the cannabis space while enjoying some healthy dividends in the process.
