The stock market has been topsy-turvy over the past year, and cannabis stocks definitely haven't remained above the fray. A combination of declining cannabis sales fueled by oversupply in well-developed markets, combined with mixed sentiment about the space as federal legalization lags, has understandably made some investors less-than-enthusiastic about the space.
Investing isn't a one-size-fits-all process. If you have the ability to handle the risk that comes with investing in cannabis stocks, there are still companies in this space worth taking a look at and holding onto for several years at least.
Bear in mind, despite the tumult of the broader cannabis industry, the legalized market is still on track to hit a valuation of more than $100 billion by the year 2030.
With that, let's take a look at two cannabis stocks you may want to consider buying, even in a cannabis bear market.
1. Cresco Labs
As one of the biggest multi-state operators (MSOs) and vertically integrated cannabis entities in the country, Cresco Labs (CRLBF 2.52%) stands to benefit considerably from the already high demand driving the current state of the marijuana industry as well as expanding legalization efforts. Cresco Labs boasts a portfolio of top cannabis brands selling hundreds of recreational and medicinal products in its own retail stores as well as wholesale to dispensaries across the country. The company also operates 53 dispensaries and retail locations.
Cresco Labs' retail presence spans seven states and counting: Arizona, Florida, Illinois, Massachusetts, New York, Ohio, and Pennsylvania. Its largest concentration of physical retail locations is currently in Florida, Illinois, and Pennsylvania.
To give some context, Florida is the largest medical marijuana market in the country. Illinois has legalized both medical and recreational marijuana, while Pennsylvania remains a medical-use state. The state of Illinois has already seen adult-use sales surpass $1 billion so far in 2022, while estimates show that Pennsylvania could cross $2 billion in sales this year.
Cresco Labs' national footprint is set to explode in the near future following the closure of its pending acquisition of Columbia Care, which boasts more than 130 retail stores in well over a dozen markets. Once the deal closes, management has said that Cresco will have the second-largest retail footprint in the marijuana market and cover more than 70% of the total addressable cannabis industry. Moreover, management is estimating that the combined company will make Cresco Labs the largest MSO on a pro forma revenue basis.
In the most recent quarter, Cresco Labs reported that its overall revenue grew 4% year over year, while retail revenue jumped 22% from the year-ago period. Meanwhile, adjusted gross profit and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose by respective amounts of 8% and 11% from the same quarter in 2021. Cresco Labs also ended the period with a healthy stockpile of cash to the tune of $90 million.
Cresco Labs' burgeoning national presence, market leadership, strong financials, and robust portfolio of industry-leading products make an intriguing case for a long-term investment in this powerhouse pot stock.
2. Innovative Industrial Properties
If the idea of investing in a traditional cannabis stock like the previous name is a bit too risky for your taste, there are certainly alternative options to invest in this space. One such stock is Innovative Industrial Properties (IIPR 2.05%), a real estate investment trust (REIT) that leases cultivation and industrial space to licensed medical cannabis operators.
Innovative Industrial Properties' triple net lease structure not only requires that tenants face considerable scrutiny before entering into a transaction but also means less potential financial risk for the entity as a whole. In a triple net lease arrangement, tenants must fulfill not only their rent obligations but also the costs of property management.
As you might imagine, this severely discourages defaults. While there are certainly exceptions -- as evidenced by the default of one of Innovative Industrial Properties' top-10 clients earlier this year -- on the whole, the REIT has continued to report high rent collection of at least 99%, along with growing profitability year after year.
Innovative Industrial Properties' business model has lent itself to considerable returns over the years, both for its balance sheet and its investors. Because of its REIT status, the company is required to pay out a minimum of 90% of its taxable earnings as dividends.
Not only does the stock currently yield 7.5% for investors -- nearly four times the yield of the average stock trading on the S&P 500 -- but its dividend has risen by a mind-blowing 620% over the past five years alone. This has given rise to a total return of nearly 500% over the trailing-five-year period.
In the most recent quarter, Innovative Industrial Properties reported that revenue rose 44% from the prior-year period. Meanwhile, adjusted funds from operations (FFO), the most instrumental metric to gauge a REIT's profitability, jumped 40% on a year-over-year basis.
If you're looking to invest in a company focused on the highly regulated and widely legalized medical marijuana space -- and which boasts robust financials and a superior dividend to boot -- Innovative Industrial Properties could be a robust addition to your long-term investment portfolio.
