Marijuana stocks had a difficult year. With the broader market falling, cannabis stocks took a bigger hit in 2022 due to the lack of progress toward federal legalization in the U.S.
But there is still hope for this industry. The industry is still in its infancy and has the potential to grow enormously over the next decade. According to MarketsandMarkets, this industry will be worth $83 billion by 2027 if it grows at a compounded annual growth rate (CAGR) of 24.3%.
Let's take a look at three cannabis businesses that are capable of benefiting from this opportunity.
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1. Innovative Industrial Properties: An ancillary Business with a solid dividend
An excellent way for risk-averse investors to make money in this high-growth industry is by investing in companies that are indirectly linked to cannabis. Innovative Industrial Properties (IIPR 0.06%) is not a pure-play cannabis company. It is a real estate investment trust (REIT) that provides capital solutions to medical cannabis companies.
The illegal status of the drug makes it challenging for pot growers to obtain the capital needed to set up larger production facilities. Innovative purchases these properties and leases them out to marijuana companies in a sale-leaseback agreement.
It earns a rental income in return, which is its only source of revenue but has been more than sufficient to let it thrive. Its tenants include well-known cannabis companies like Trulieve Cannabis, Curaleaf Holdings, Cresco Labs (CRLBF 2.49%), and Green Thumb Industries (GTBIF 2.46%). The more these companies grow, the more business Innovative will have.
These tenants have a long triple net lease with Innovative. Furthermore, its weighted-average lease term is 15.5 years, indicating that it will generate revenue for many years to come.
However, there's always the possibility of tenants defaulting. But as the cannabis industry grows, it can always find new tenants. Innovative has significantly increased its revenue and funds from operations over the last five years, even in a limited legal market in the U.S.
IIPR Revenue (TTM) data by YCharts
Innovative not only provides investors with a safer way to invest in cannabis, but it also allows them to earn passive income. The REIT's current dividend yield is 6.4%, which is significantly higher than the S&P 500's average yield of 1.8%. Because REITs are legally bound to pay out 90% of their taxable income as dividends, they typically have a high dividend yield.
Since its initial public offering (2017), Innovative has increased dividends 14 times. It has been able to do so due to rising adjusted funds from operations (AFFO). The amount of money available for dividend payments is determined by AFFO, which is similar to net income for non-REITs.
Overall, Innovative is an appealing pick for both growth and income investors.
2. Cresco Labs: A pot retailer that's widening its reach through key acquisitions
Though Cresco Labs operates just 55 stores nationwide, it is still in close competition with its peers in terms of revenue. It generated $822 million in revenue in 2021.
Cresco plans to close its acquisition of Columbia Care by the fourth quarter of 2022. This acquisition will add another 130 dispensaries to its portfolio. Acquiring another rising cannabis company when valuations are low is a smart move, pushing it to the forefront of the industry. According to management, the company's focus is currently on long-term profitability, with underperforming facilities being closed down to save money.
Cresco could benefit from the Pennsylvania and Florida cannabis markets when recreational cannabis legalization happens. Although neither state has legalized recreational marijuana, there has been progress. It currently operates 10 dispensaries in Pennsylvania and 20 stores in the Sunshine State. Columbia's acquisition will add 14 new stores to its portfolio in Florida.
3. Green Thumb Industries: An aggressive player with a budding partnership
From just 39 dispensaries in eight states in 2019 to 77 dispensaries in 15 states now, Green Thumb Industries has come a long way. This aggressive expansion has also enabled the company to quadruple its revenue from $216 million in 2019 to $894 million in 2021.
The pot grower has also successfully generated positive GAAP net income for nine consecutive quarters. More U.S. states legalizing cannabis this year will allow it to have a stronger foothold in the market. In the near future, Pennsylvania and Florida could also be exciting new markets for Green Thumb.
Green Thumb operates under its Rise brand of stores nationwide. It now has seven of them in Florida. Its lease with Circle K, a global convenience store chain, will allow it to open 10 more stores in the state. In Pennsylvania, it operates 16 Rise brand stores.
If Green Thumb's growth strategies are successful, it will also be able to expand into the growing European medical cannabis market. This market is poised to grow at a CAGR of 61% by 2028, reaching a value of $14 billion.
If cannabis is legalized in the U.S., not all companies will be able to profit from it. The competition will become fierce as the market expands. Only financially secure companies, such as Cresco Labs and Green Thumb, have a chance to become top contenders.
