As 2022 draws to a close, the cannabis sector is once again heating up. With marijuana regulations on the ballot, major players in the industry making big changes to their strategies, and many companies struggling to grow their sales, there's a whirlpool containing both danger and opportunity for investors.
Here are three of the top pot businesses that are worth keeping an eye on in December and beyond. Even if their more ambitious plans don't play out over the coming year, there's going to be a lot to learn from their experiences.
1. Canopy Growth
Since its announcement in late October that it would enter the U.S. cannabis market faster than previously planned, Canopy Growth's (NASDAQ: CGC) shares are up by around 45%, and there might be more to come.
The cannabis cultivator's pivot to focus on the U.S. comes at a time when it's selling off its Canadian retail outlets, meaning that the Canopy Growth of 2023 and beyond will look little like what investors are accustomed to. That makes it worth watching, as more changes will probably need to happen before the company's twin problems of a lack of profits and a sagging top line have a chance to be resolved.
The other factor that makes this stock worth paying attention to is that its BioSteel sports beverage segment is firing on all cylinders. Net revenue from the drink rose by 299% in the second quarter (period ended Sept. 30) compared to a year prior. If it continues to scale up its beverage manufacturing capabilities while securing high-profile endorsements from organizations like the National Hockey League, it'll lend credence to management's idea that Canopy is a consumer packaged goods company rather than a cannabis company.
In the long term, that diversification could help it weather downturns in the marijuana market, which would make it a somewhat juicer investment than its pure-play peers.
2. Green Thumb Industries
Green Thumb Industries (OTC: GTBIF) is one of the few multi-state operators (MSOs) that's expanding its sales while remaining profitable, and that means it's a good company to watch.
With its third-quarter revenue of $261 million -- a healthy rise of 12% year over year -- it's also positioning to double its number of retail outlets in state markets with limited numbers of sales and distribution licenses. The company had 77 retail locations by the close of the quarter. But there's an even larger expansion opportunity on the table over the next few years.
Via a new property-leasing collaboration with the Circle K convenience store chain, Green Thumb plans to open small dispensaries at Circle K locations in Florida to sell its medical marijuana products. Ten such dispensaries are slated to open in 2023, but Circle K's footprint in Florida includes 600 stores. So if Green Thumb's experiment next year turns out well, it could potentially go on to penetrate a massive portion of the market in Florida, threatening the established competitor there, Trulieve Cannabis. And that could be huge for shareholders.
3. Innovative Industrial Properties
Innovative Industrial Properties (NYSE: IIPR) is often called the landlord of the marijuana industry, and the real estate investment trust (REIT) is intent on expanding its collection of cannabis-cultivation real estate. Despite the default of one of its tenants called Kings Garden earlier this year, as of Nov. 2 the company reported that it had collected 97% of its expected rent in 2022 so far.
But with a (small) crack in the facade and more turbulence likely on the way for the marijuana industry, investors are likely to be on high alert for any added signs of trouble, which is why it makes sense to watch this stock.
That hasn't stopped the company from forging ahead with its strategy of performing sale-leaseback transactions to accumulate more rental space. This year, it bought nine properties and signed the paperwork for nine property improvements, investing a total of $368.6 million.
And even with the revenue lost from the default, its third-quarter total revenue of $70.9 million was still more than 32% higher compared to the same quarter last year. With growth like that and the prospect of marijuana legalization on the horizon, 2023 will likely be another watershed year for Innovative Industrial Properties.
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Alex Carchidi has positions in Innovative Industrial Properties. The Motley Fool has positions in and recommends Green Thumb Industries, Innovative Industrial Properties, and Trulieve Cannabis Corp. The Motley Fool has a disclosure policy.