If you thought last year was difficult for the broad-market stock indexes, take a closer look at how marijuana stocks fared. The vast majority of publicly traded pot stocks lost more than half of their value in 2022 as high inflation, growing competition, and a lack of cannabis reform on Capitol Hill weighed on the industry.
But a big down year for weed stocks may be the green light investors have been waiting for. Research firm BDSA is still estimating that global cannabis sales will nearly double from $30 billion in 2021 to $57 billion by 2026, with the U.S. accounting for roughly three-quarters of this $57 billion. With consumers treating cannabis as a nondiscretionary good and buying pot products even in the face of high inflation and a weaker economic outlook, it could be a smart industry to invest in during the ongoing bear market.
What follows are the four best marijuana stocks you can buy in 2023.
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Innovative Industrial Properties
The first cannabis stock that stands out as a surefire buy in the new year is marijuana-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR -0.92%), or IIP for short.
REITs are businesses that purchase property, which is then leased for extended periods. In IIP's case, it's looking to buy medical marijuana cultivation and processing facilities and reap the long-term reward of rental income. As of the end of September, the company owned 111 properties covering 8.7 million square feet of rentable space in 19 legalized states.
The beauty of REITs is that they usually generate highly predictable cash flow over many years. IIP collected 97% of its rents on time through the first nine months of 2022, and its weighted-average lease length was 15.5 years. Because the REIT operating model doesn't lead to many surprises, IIP is comfortably paying out a 7.2% dividend yield.
Another reason for Innovative Industrial Properties' ongoing success is its triple-net lease structure. Triple-net leases require the tenant to cover all property expenses, including utilities, maintenance, property tax, and even insurance. The downside of a triple-net lease is it reduces the amount IIP charges for rent. On the bright side, it virtually eliminates surprise expenses, which helps create the cash-flow transparency that powers its inflation-crushing payout.
IIP is also one of the few cannabis stocks benefiting from the lack of progress reforming federal marijuana laws. The company's sale-leaseback program seeks to acquire facilities with cash and immediately leases the property back to the seller. These sale-leaseback agreements put cash into the hands of multistate operators (MSOs) that might otherwise have limited access to basic banking services. In return, IIP lands long-term tenants.
Green Thumb Industries
Among U.S. MSOs, Green Thumb Industries (GTBIF 5.56%) is, arguably, the best pot stock to buy in 2023. Even with increased competition in the U.S., Green Thumb brings clearly defined catalysts to the table.
When December 2022 began, the company had 77 operating dispensaries and a presence (including cultivation, processing, or wholesale) in 15 states. Though some of these states are the high-dollar markets you'd expect MSOs to flock to, such as California, Florida, and Colorado, Green Thumb has spent a lot of time pushing into limited-license markets in recent years. These markets, such as Illinois, Pennsylvania, Virginia, and Massachusetts, limit how many dispensary licenses can be issued in total and to a single business. In other words, these states allow MSOs of all sizes a fair shot at building up their brands and customer following.
Green Thumb has managed to grow its business at a ferocious pace. After producing $62 million in full-year sales in 2018, the company is estimated to have surpassed $1 billion in revenue in 2022. This double-digit sales growth should continue for at least the next couple of years given that the company has enough retail licenses in its back pocket to double its number of operating dispensaries.
But the real benefit of owning Green Thumb Industries is its revenue mix. More than half of this estimated $1 billion in sales for 2022 will have come from derivative cannabis products, such as edibles, beverages, dabs, vapes, pre-rolls, and various health and beauty products. Derivative cannabis products sport higher price points and more lucrative margins than dried cannabis flower. The result is nine consecutive quarters of generally accepted accounting principles (GAAP) profit. By comparison, most MSOs are still looking for their very first GAAP profit.
Green Thumb Industries has all the tools in place to potentially double your money in 2023.
Image source: Getty Images.
Trulieve Cannabis
The third marijuana stock that represents a phenomenal buy in 2023 is U.S. MSO Trulieve Cannabis (TCNNF 10.28%). Although Trulieve's bottom line has recently been hurt by a number of one-time expenses related to acquisitions and the closure of redundant assets, this temporary weakness has provided the ideal opportunity for investors to pounce.
In terms of sheer size, Trulieve takes the cake from a retail standpoint. As of the end of November, it operated 180 dispensaries and had a presence, whether retail, processing, or cultivation, in 11 states. But it's the company's pathway to expansion that really stands out as unique.
While most MSOs have been setting up shop in as many large-dollar marijuana markets as possible, Trulieve Cannabis spent almost all of its energy prior to mid-2021 building up a presence in medical marijuana-legal Florida. The interesting thing about Florida's cannabis market is that while fewer than two dozen retail licenses have been issued, license holders are free to open an unlimited number of dispensaries. Trulieve accounts for 122 of the Sunshine State's 493 operating dispensaries.
The advantage of completely saturating one of the top-dollar marijuana markets in the U.S. is simple: strong branding and customer awareness. With Trulieve stores spread throughout Florida, marketing expenses have been kept relatively low, which has helped the company produce 19 consecutive quarters (three months shy of five years) of adjusted profits.
The next step in Trulieve's growth process is taking full advantage of its acquisition of MSO Harvest Health & Recreation. This deal expanded its presence into the mid-Atlantic and more importantly gave Trulieve the leading share of the recreationally legal Arizona market.
Look for steady same-store sales growth and ongoing adjusted profits to push Trulieve Cannabis stock higher in 2023.
Cresco Labs
The fourth and final best marijuana stock to buy in 2023 is U.S. MSO Cresco Labs (CRLBF 6.83%). Once again, the best cannabis investment ideas can be found in the U.S.
Cresco Labs and Green Thumb have approached their expansions somewhat similarly. While Cresco has 55 operating dispensaries, some of which are in high-dollar markets, it's been primarily expanding its presence in limited-license markets, such as Illinois, Ohio, and Pennsylvania. Cresco is smaller than Green Thumb, so the protections afforded by limited-license markets to newer entrants should come in handy and allow the company to build up a loyal following.
The most exciting development for Cresco Labs in the new year is the expected closure of its all-share buyout of MSO Columbia Care (CCHWF 10.53%). Columbia Care has primarily grown by acquisitions. Taking into account the disposition of around a dozen aggregate assets spanning three states, the combined entity will have more than 120 operating dispensaries in 18 legalized states when the merger finalizes. In short, Cresco Labs will be able to reach more than half the U.S. population with its products.
Something else to understand about Cresco Labs is that it has the industry's leading wholesale operations. The knock against wholesale has long been that it has lower margins when compared to the retail side of the equation. But what's being overlooked here is that Cresco holds a cannabis distribution license in California and therefore has volume on its side. All told, more than 1,200 dispensaries nationwide are selling the company's proprietary pot products.
Lastly, if investors want a smart way to get an even bigger discount on Cresco Labs, they can purchase shares of Columbia Care. Assuming this deal closes (and all signs point to that happening), Columbia Care shareholders will receive 0.5579 Cresco shares for each Columbia Care share they own. Columbia Care ended last week at a 26% discount to this conversion price based on where Cresco Labs closed. That's an incredible arbitrage opportunity that'll eventually give you a position in Cresco Labs.
