Investors in cannabis companies should know they're playing a long game. That's because marijuana sales will continue to rise as more states legalize cannabis over the next few years. And eventually, if federal decriminalization occurs, the blinders will really come off for the industry. But before that happens, with share prices currently down for most cannabis stocks, it makes sense to invest in sound marijuana businesses now.
Industry forecaster BDSA placed the global legal cannabis market at $32 billion in 2022 and expects it to grow to a $59.6 billion market by 2027, at a compound annual growth rate of 13.2%.
That's great, but which cannabis companies are the best ones to buy right now? Look for companies that are positioning themselves for long-term sales growth, coupled with disciplined growth strategies, as well as a clear path to profitability. Forget, for now, where their shares have been lately and focus on Curaleaf Holdings (CURLF 2.02%), NewLake Capital Partners (NLCP), and OrganiGram (OGI -1.03%). Two of the three actually turned a profit in their most recent quarters, and the other is producing the most revenue of any cannabis retailer.
Curaleaf: Positioned for more growth, profit
Curaleaf, with 148 dispensaries across 19 states, is the No. 1 pure-play cannabis company in terms of revenue. The multi-state operator (MSO) has seen its shares drop 35% over the past year, and that fall has continued with a 9% decline so far in 2023. Picking Curaleaf stock now might seem to be a contrarian play, but the company is poised to have a strong year.
Over the last few months, New York and Connecticut opened to adult-use sales, and Curaleaf has a big presence in all both states. In Connecticut, it has four dispensaries; the company was the first to do adult-use sales in Hartford. It also has locations in Groton, Milford, and Stamford and said it anticipates opening more in the state, pending regulatory approval.
In New York, Curaleaf has dispensaries in Queens, Forest Hills, Newburgh, and Plattsburgh. While Executive Chairman Boris Jordan has said he isn't thrilled with how the rollout of adult-use sales in the state has been tilted against MSOs, eventually, New York will need MSOs to generate tax revenue.
Curaleaf is still managing revenue growth when other MSOs are seeing contraction. In the third quarter, the company reported revenue of $340 million, up 7%, year over year and 1% sequentially. The company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was listed as $84 million, up 18% year over year. Through nine months, the company's revenue was $986.7 million, up 11% over the same period in 2021.
The company isn't profitable -- it reported an earnings per share (EPS) loss of $0.07 loss in the third quarter, compared to an EPS loss of $0.08 in the third quarter of 2021, but Curaleaf is making bold steps to become profitable. It is closing operations in states where price compression and illegal cannabis sales have cut into its margins -- California, Oregon, and Colorado. It's also trimming back 10% of its workforce. The company will likely take some impairment changes on its restructuring efforts, but in the long run, the moves make sense for the company's bottom line.
NewLake Capital Partners: Jump in, the water's fine
Cannabis retailers are hurting, with lower margins, inflation, and higher labor costs, so that is also bad news for cannabis real estate investment trusts (REITs) such as NewLake Capital Partners, as they are essentially landlords to cannabis companies.
However, because NewLake has been selective about whom it rents out its 32 properties to (including dispensaries and cultivation facilities), the company's financials are on solid ground. In the third quarter, 100% of the company's properties were leased and the collection rate on those properties was 100%. The company's stock is down 31% over the past year but has been flat so far this year.
NewLake's revenue through nine months is $32.6 million, up 70.9% year over year, while funds from operations (FFO) rose in that period 94.5% to $24.7 million. The company reported a nine-month adjusted FFO of $27.8 million, up 90.9% year over year.
NewLake has an attractive dividend, which it just raised by 5.4% to $0.39 per quarterly share, the seventh consecutive quarter the company has increased its dividend. That works out to a yield of 9.28%. Even with continued increases, the dividend is covered with an AFFO payout ratio of 79.5%, considered safe for a REIT, especially one with NewLake's consistent cash flows.
OrganiGram is on the way up
OrganiGram's shares are down more than 46% over the past year and over 6% so far in 2023. That's despite obvious financial growth for the Canadian cannabis retailer.
In the first quarter of fiscal 2023, the company reported revenue of $43.3 million Canadian dollars, up 43%, year over year, and adjusted EBITDA of CA$5.6 million, up from negative CA$1.9 million in adjusted EBITDA in the same period in 2022 and the company's fourth consecutive quarter of positive adjusted EBITDA.
Most importantly, the company turned a profit of CA$5.3 million, up 508% year over year, which CEO Beena Goldenberg attributed to a record harvest and a lowered cost of cultivation. The company has turned to technology to improve product yields, using a database it calls OrganiGrow that tracks grow cycles by harvest period, strain, room, environmental conditions, and other factors. In Canada, the company is the No. 1 seller of milled flower and the No. 3 seller in gummies and hash.
The company has forecasted continued growth this year because of its market share, increased capacity, and an uptick in international sales, mostly to Israel and Australia.
It's not all roses for OrganiGram. The company was just informed by the Nasdaq that, because its shares have been below $1 for 30 days or more, it is in danger of being delisted from the exchange. The company has 180 days to turn around its stock price, but if it doesn't, not being listed would certainly hurt the company's ability to raise funds through secondary stock offerings.
