It's been a difficult year for marijuana stocks, with the AdvisorShares Pure US Cannabis ETF and the ETFMG U.S. Alternative Harvest ETF both down more than 22% so far this year, even while the S&P 500 index is up 18% and the Nasdaq Composite has gained 33%.
Labor issues, a glut of cannabis, high government taxes, and competition from illegal sellers have taken their toll on many cannabis companies. Investment bank Cowen puts the U.S. legal cannabis market at $28.9 billion in 2023, climbing to $36.3 billion by 2026. It's obvious that growth is coming as more states open to both recreational and medical cannabis sales, but it's also obvious that not every cannabis company is going to survive.
If you're looking for three solid long-term choices in the industry, try Innovative Industrial Properties(NYSE: IIPR), Green Thumb Industries(OTC: GTBIF), and TerrAscend(OTC: TRSSF).
1. Innovative shakes off concerns
Innovative Industrial Properties, the largest real estate investment trust (REIT) that focuses on cannabis producers, specializes in buying property from retailers and then leasing it back to them with triple-net leases that put most maintenance expenses on the tenants. It operates 108 properties across 19 states, though that total includes five properties under development.
The company's stock is down more than 21% so far this year. That's good news for prospective investors, though, as the dividend yield has risen past 9%.
Innovative showed its strength in its second-quarter earnings, which it reported on Aug. 2. Revenue of $76.5 million was up 8% year over year. For REITs, adjusted funds from operation (AFFO) are considered a more accurate sign of profitability than net income and earnings per share (EPS). Second-quarter AFFO of $64 million and AFFO per share of $2.26 were up 6% and 5%, respectively, compared to the same period last year.
That juicy dividend, which Innovative raised by 2.9% in the third quarter last year to $1.80 per quarter, is secure with an AFFO payout ratio of 79.6%, well within the safety guidelines for a REIT. The company has increased its dividend every year since it began offering one in 2017.
Some of Innovative's tenants have struggled. The company said that it collected 97% of the rent it was owed in the second quarter, including $1.5 million in security deposits from Holistic Industries at properties in Michigan and California, and Temescal Wellness of Massachusetts. In both cases, the security deposits are to be paid back over the next 12 months.
However, when a tenant does default, as King's Garden did in 2022, the company has been able to lease the property out to another cannabis retailer. Innovative has broadened its tenant portfolio, which makes it less vulnerable. No one tenant represents more than 14% of the company's portfolio, and 89% of the company's tenants are larger multi-state operators (MSOs).
2. Green Thumb Industries is back to profitability
Green Thumb Industries is practically a unicorn among U.S. cannabis retailers because it is turning a profit. Despite that, the stock is down more than 20% so far this year. The company has a forward price-to-earnings ratio of 24. It's hard to determine if that's low or high because there are no other MSOs that are profitable.
Green Thumb is a large MSO, with 84 dispensaries in 15 states, but it has taken its time with growth. In the first quarter, the company reported revenue of $249 million, up 2% year over year. It also reported net income of $9 million, or $0.04 in EPS, compared to net income of $28.9 million, or $0.12 in EPS, in the prior-year period. Net income and EPS were up over the prior quarter, though, which saw a net loss of $51.2 million and an EPS loss of $0.22.
The company has stuck to states that issue limited licenses, which are more profitable for MSOs, and it should see improved revenue in the third quarter because, on July 1, it opened up four of its Rise Dispensaries adult-use locations in Maryland, which is off to a strong start in recreational sales.
Maryland reported $87.4 million in overall cannabis sales in its first month of allowing recreational sales. By comparison, New Jersey had $24 million in cannabis sales in July, and New Mexico had $22 million in pot sales last month.
3. TerrAscend sees yearly revenue and profitability growing
TerrAscend is a mid-size MSO with 38 dispensaries in California, Michigan, Pennsylvania, New Jersey, and Maryland. All but Pennsylvania allow both adult-use and medical cannabis sales.
Unlike the other two cannabis stocks, TerrAscend's shares are up so far this year with a 21% gain. The company just released a preliminary second-quarter report saying it is on track for a seventh consecutive quarter of revenue growth.
In the first quarter, revenue of $69 million was up 43% year over year. And the company says it had second-quarter revenue of $72.1 million, up 13% year over year and 3.9% sequentially. Like Green Thumb Industries, TerrAscend operates four dispensaries in Maryland, so it should show a revenue rise in the third quarter as well.
The company also increased its forecast to say it expects 2023 revenue to be at least $305 million, up 23%, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations of $58 million, up 49%.
TerrAscend didn't announce its anticipated bottom line, but it has shown a trend of edging closer to profitability. In the first quarter, it reported a net loss of $2 million, less than the net loss of $13.8 million in the previous quarter and $19.2 million in the same period a year ago.
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Jim Halley has positions in Innovative Industrial Properties. The Motley Fool has positions in and recommends Green Thumb Industries and Innovative Industrial Properties. The Motley Fool has a disclosure policy.