The cannabis industry has remained a volatile place for investors over the past few years, as discussions about federal legalization remain in flux and changes at the state level emerge in a piecemeal fashion. Even so, at the time of this writing, 37 states have legalized marijuana for medical purposes, while 21 have also done so for recreational purposes.
For risk-tolerant investors, the slow but steady progress in the industry presents compelling opportunities to buy into companies poised to benefit from these tailwinds. Here are two cannabis stocks to consider right now.
1. Innovative Industrial Properties
Innovative Industrial Properties (IIPR 0.64%) is something of a rarity in the world of cannabis stocks because the company doesn't cultivate or sell marijuana or its derivatives. It's a real estate investment trust (REIT), and it owns and operates an expanding portfolio of properties and industrial facilities that it leases to state-licensed growers of medical cannabis.
The company has proved to be a remarkably resilient investment in an otherwise volatile industry, and that comes down to a few elements specific to its business. For one, by only leasing its properties to medical cannabis growers, it is focusing on the more widely legalized and regulated side of the marijuana industry. There's also the fact that Innovative Industrial Properties requires its tenants to sign triple net lease contracts, with the average term of a lease at about 15 years.
The duration of these leases and their structure (in a triple net lease arrangement, the tenant is responsible for almost all of the costs of operating and maintaining the property) continue to lend a measure of resilience and safety to this business, even as volatility remains in the broader cannabis landscape. No single tenant accounts for more than 14% of its portfolio, and as of the end of 2022, the company had collected 97% of all rent due for the year.
Over the past five years, revenue and funds from operations (FFO) -- an important measure of REIT performance -- have risen by 1,300% and 1,500%, respectively, driving the continued growth of its dividend, which has risen by 620% in that same period. Its dividend currently yields an incredible 8.6%.
The company has continued to add to its portfolio of properties during the past year, growing to 110 in 19 states as of the end of 2022, while reporting that 100% of its operating portfolio was rented. In short, even against the uncertain backdrop of the cannabis market, demand remains strong and the business continues to grow.
As of the end of the third quarter, the REIT had $77 million in cash on its balance sheet and no secured debt. This cash-rich, rapidly growing, and profitable business stands out in the world of cannabis stocks. If you're looking to invest in the future of this industry without going the traditional route, Innovative Industrial Properties might be worth considering.
2. Green Thumb Industries
If you're looking to invest in a more traditional cannabis stock, Green Thumb Industries (GTBIF 1.52%) is one of the largest multi-state operators in the country with a business that is both expanding at a steady clip and profitable. The marijuana company owns and operates a growing portfolio of 77 retail locations across the country, and sells its own collection of cannabis brands both in-store and online for recreational and medicinal use.
Some of its branded products include vaporizer pens, edibles, and medical cannabis products infused with cannabis derivatives like oils and lotions. The company operates in 15 states, including Illinois, Nevada, Virginia, New York, and Pennsylvania.
Green Thumb Industries is also in the process of expanding its footprint in the largest medical marijuana market in the country, Florida. It currently has seven retail locations and counting in the state.
The company is partnering with the multinational convenience store chain Circle K to get its medical marijuana products into the hands of more consumers. In the company's third-quarter earnings report, management noted the following about its expansion in Florida through this new partnership: "Green Thumb plans to launch its test and learn phase of the rollout in 2023, with approximately ten 'RISE Express' branded medical dispensaries adjacent to Circle K stores in various Florida locations. Through the exclusive agreement, Green Thumb can lease space adjacent to Circle K locations in Florida, where the retailer currently operates approximately 600 locations."
Florida recorded medical marijuana sales of about $1 billion in 2022. Green Thumb's strategy to boost its presence in the Sunshine State, combined with its quickly growing presence in other key marijuana markets, are all bright green flags for this company.
The company's financials continue to impress. In the third quarter, it generated revenue of $261 million, up 12% from the prior-year period, while reporting its ninth consecutive quarter of profitability with net income of $10 million.
The profitability of this cannabis stock, combined with its continued headway in key medical-use and recreational markets, could make it a worthy addition to a well-diversified portfolio.
