Cannabis is considered a growth industry, but many of the companies operating in it haven't grown much this year. The ETFMG Alternative Harvest ETF is down more than 28% to start the year, and the AdvisorShares Pure Cannabis ETF is down more than 27% in the same period.
There are good reasons for those struggles -- price compression, high taxes, and high interest rates have battered the fledgling industry. The fact that federal marijuana reform doesn't seem to have any momentum is another reason why investors are staying on the sidelines, even while more states approve medical or recreational sales.
That's why most pot stocks so far this year have been short-term investment duds. But successful investing often requires taking a long-term approach, and there are cannabis companies that are growing revenue and net income and have the potential to be explosive. Companies such as New Lake Capital Partners (NLCP 1.43%), Green Thumb Industries (GTBIF 0.04%), and Tilray (TLRY 2.52%).
Let's find out a bit more about these three pot stocks.
1. NewLake Capital Partners' shares are down, and finances are up
NewLake Capital Partners shares are down more than 18% so far this year. The company is a cannabis real estate investment trust (REIT). As of Aug. 9, all of its 32 properties across 12 states were leased with triple-net leases and an average lease remaining term of 14.5 years.
The company focuses on quality clients and remains conservative in who it leases its properties. Its largest tenant is Curaleaf, which accounts for 21% of its facilities, followed by Cresco Labs, which leases 11.5% of NewLake's properties. Both are well-established multi-state operators (MSOs) that are not profitable yet but have steadily growing revenue.
NewLake makes an attractive long-term investment because it delivers a high-yielding dividend that is well covered by the company's adjusted funds from operations (AFFO). The quarterly dividend, which the company raised by 5% last year to $0.39 a share, generates a yield of around 12%. That kind of return means investors can buy the stock and sit on it and double their money in a little more than six years -- even if the stock's price stays the same. The AFFO payout ratio is 85%, considered safe for REITs that have tax rules requiring them to return 90% of their income to shareholders.
Through six months, all of the company's financials were improved. NewLake reported revenue of $22.8 million, up 10.2% year over year, and a net income of $11.7 million, compared to $8.8 million in the same period last year. FFO and AFFO are considered better metrics of profitability for REITs, and both of those improved. FFO through six months was $19 million, up 31.3%, and AFFO was $19.8 million compared to $17.2 million in the same period last year.
2. Green Thumb Industries stays true to its name
Green Thumb is a U.S. cannabis MSO based in Chicago with 84 Rise dispensaries across 15 markets. The company's stock is down more than 22% so far this year, even though it was profitable in 2022 and has put together two consecutive profitable quarters in 2023, something no other large U.S. pure-play cannabis retailer can claim.
In the second quarter, it reported revenue of $252 million, up 2% sequentially, albeit down slightly from the $254.3 million Green Thumb reported in the same period a year ago. It also said it had a net income of $13.4 million, or $0.05 in earnings per share (EPS), up 2% in both cases sequentially, but down from the $24.4 million in net income and $0.11 in EPS it reported in the same period a year ago.
Green Thumb CEO Ben Kovler, the great-grandson of former Jim Beam investor Harry Blum, has kept the company's finances on track by reining in costs and finding growth from within instead of through costly mergers. Kovlar sees cannabis, which is still illegal federally, as having similarities with what liquor went through coming out of prohibition in the 1930s. Blum bought out his partners in Jim Beam for $1 million in 1941.
3. Tilray is rebounding well
Tilray's business strategy is a little different from the prior two cannabis companies in that the MSO operates under a more risky but potentially more explosive philosophy of thinking big. The company's forays into beer make sense at a certain level as they give the company one more way of driving revenue, particularly until federal legalization makes it easier for pure-play cannabis companies.
Plus, once federal legalization does arise, there's plenty of potential for THC-infused beverages and market synergies with cannabis that Tilray, with its recent $85 million purchase of eight beer and beverage brands from Anheuser-Busch InBev, can tap into, allowing it to expand its cannabis operations south of the Canadian border.
Tilray already owns SweetWater Brewing Company, Montauk Brewing Company, Alpine Beer Company, and Green Flash Brewing Company. The addition of Shock Top, Breckenridge Brewery, Blue Point Brewing Company, 10 Barrel Brewing Company, Redhook Brewery, Widmer Brothers Brewing, Square Mile Cider Company, and HiBall Energy from Anheuser Busch more than doubles the company's beer business, making it the fifth-largest craft brewer in the U.S.
The company's recently completed acquisition of troubled cannabis retailer Hexo means Tilray now has the top share in adult-use sales across all Canadian markets.
Tilray's stock is down roughly 2% this year. Over the past month, during which time the company reported record fourth-quarter revenue, shares have risen 55%.
Tilray said it had quarterly revenue of $184 million, up 20% year over year. It also narrowed its net losses in the quarter to $120 million in the fourth quarter compared to a net loss of $458 million in the same period last year.