Sometimes, you have to turn over a new leaf when you're looking for marijuana stocks to invest in. There's plenty of long-term growth anticipated for the industry, but short-term headwinds have sent many cannabis stocks into a tailspin.
NewLake Capital Partners (NLCP 1.06%), Green Thumb Industries (GTBIF -4.88%), and Turning Point Brands (TPB -1.69%) all have different levels of exposure to cannabis, but the one thing I like about all three is their solid financial positions. Here's a look at each.
1. NewLake Capital Partners: Still a hidden gem
NewLake Capital Partners is a real estate investment trust (REIT) that specializes in triple net leases of industrial and retail property to cannabis companies. The company's shares are down more than 16% so far this year but up a little more than 9% this month.
NewLake isn't as affected by high interest rates and tenant woes as much as some REITs. Its top three tenants are some of the biggest and most successful cannabis retailers in the U.S.: Curaleaf Holdings, Cresco Labs, and Trulieve Cannabis. Only one of its tenants, Revolutionary Clinics, has defaulted on first-quarter rent, and NewLake said it expects first-quarter portfolio rent collection to be between 90% to 93%.
As far as high interest rates being a problem, NewLake has built-in rent escalations on its properties, and it has long-term leases averaging 14.6 years in duration. Last year, the company reported revenue of $44.8 million, up 59.6%, and adjusted funds from operations (AFFO) -- a more accurate metric for REITs than net income -- was $38.7 million, up 77.8%. Those are not the numbers of a struggling company.
It also has relatively low debt. Its debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio is only about 0.1, while the largest cannabis REIT, Innovative Industrial Properties, has a debt-to-EBITDA ratio of 1.3.
NewLake's quarterly dividend of $0.39 equals a yield of 12.4%, more than seven times the average S&P 500 dividend yield of 1.7%. The company reported AFFO per share of $0.50 in the past quarter, so the dividend's AFFO payout ratio is only 78%, well within the safety guidelines for a REIT.
2. Green Thumb Industries is in the green
Green Thumb Industries is something a lot of other pure-play cannabis companies aren't: profitable. The company reported first-quarter earnings on May 3, with net income of $9 million, up from a $51.2 million loss in the previous quarter, though down 68.8% year over year. It's the 10th quarter in the past 11 that it has turned a profit. It also reported revenue of $249 million, up 2% year over year.
Its shares are up more than 2.5% so far this year and more than 26% over the past month, far better than most pure-play cannabis companies are faring in 2023.
Green Thumb has focused on improving margins by increasing its efficiency and verticality (focusing on selling its own brands in its stores), not on growing through mergers and acquisitions. That conservative approach is paying off in a market where a glut of cannabis and labor issues are cutting into profits for most cannabis companies. The company has 79 retail locations across 15 states.
CEO Ben Kovler said the company has seen business pick up in states that recently approved adult-use sales, including New Jersey, Rhode Island, Connecticut, Virginia, and Minnesota (though Virginia and Minnesota haven't yet begun allowing adult-use sales).
The company's strong cash flows and low debt-to-EBITDA ratio of 0.9 give it flexibility in determining how and where it plans to grow its business.
3. Turning Point Brands is a safer bet
Turning Point is known more as a tobacco company, but its Zig-Zag segment, which sells rolling papers used for cannabis consumption, is its biggest segment by sales. The segment has also shown a 14% compound annual growth rate over the past five years.
Turning Point's shares are up more than 4% so far this year. The company benefits as more states decriminalize marijuana but isn't hurt by the price compression and high taxes that are cutting into the bottom lines of pure-play cannabis retailers. Turning Point has only had three unprofitable quarters in the past decade.
The company reported $101 million in first-quarter revenue, up 0.1%, year over year, though net income fell 30.9% to $7.6 million and EPS for the quarter was $0.41 compared to $0.55 in the same period last year. The company said that planned inventory reduction at certain retailers for Zig-Zag papers led to lower income.
Turning Point Brands is working to increase Zig-Zag's online sales and sales at head shops and dispensaries in the meantime. The segment includes other products, other than rolling papers, that are used in cannabis consumption, such as Clipper lighters, hemp wraps, and cigar wraps.
Turning Point Brands also offers a quarterly dividend, which it raised this year by 8% to $0.065 a share, the third consecutive year the company has increased its dividend. The yield is currently around 1.2%.
