Cannabis investors had been waiting for a surge in marijuana stocks since the end of 2017. They finally got one this year.
Unfortunately, it didnt last.
The Prime Alternative Harvest Index, which tracks the performance of some of the cannabis industrys most prominent companies, was up 46% year-to-date through mid-April. And then the wheels fell off. Through mid-August, the index has gained 14.5% YTD, well off its February highs and lagging the broader market.
Investors are likely wondering which direction marijuana stocks are headed in the final months of 2021 and beyond. A soon-to-be-launched ETF might provide a clue.
Roundhill Investments, the people behind the popular Roundhill Sports Betting & iGaming ETF (BETZ), are launching the Roundhill Cannabis ETF (WEED) on Nov. 1. The fund will be actively managed, holding cannabis investments up and down the industry ecosystem.
While marijuana stocks have taken a decidedly negative turn in the middle part of the year, the launch of another cannabis ETF is a sign Wall Street believes the future for this industry remains positive.
Lets look at 10 of the best marijuana stocks, funds and other investments to ride a renewed cannabis wave.
Data is as of Aug. 18.
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Innovative Industrial Properties
- Market value: $5.5 billion
Innovative Industrial Properties (IIPR, $231.49) is a real estate investment trust (REIT) that invests in greenhouses and industrial facilities for the medical cannabis industry. Founded in 2016, it boasts 73 properties with a stellar occupancy rate of 100%.
The REIT has a diversified portfolio of properties located in 17 states, with nine of them – including Illinois, California and Pennsylvania – accounting for almost 90% of its 6.8 million square feet of rentable space.
In August, IIPR acquired a property in Illinois with 250,000 square feet of industrial space for $6.5 million. In addition, the REIT has promised to reimburse 4Front Ventures for construction costs up to $43.75 million. Once completed, 4Front will operate a licensed cannabis cultivation and processing plant.
Thats a total investment of more than $50 million – nothing new for Innovative Industrial Properties, which has invested $1.7 billion in capital to its various properties.
IIPR is a popular stock among analysts, garnering six Buys versus just two Holds and no Sell calls of any sort. And it has been one of the best marijuana stocks to own for years, delivering an annualized total return of 91.0% since this point in 2018.
That soaring stock price has reduced its yield to about 2.4%, but IIPR remains one of the few marijuana stocks that produces any income. Making up for that is the REITs stellar dividend growth. The payout has exploded by 460% since the start of 2018, to $1.40 per share, and has been raised multiple times each year in that time.
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- Market value: $88.9 billion
Marlboro maker Altria (MO, $48.22) has not had a good stretch over the past few years. The stock has delivered a five-year annualized total return (stock price and dividends) of negative 0.9%.
Altria shares have been knocked around in recent years due to write-downs taken from its $12.8 billion 2018 investment in e-cigarette maker Juul Labs. The investment gave it a whole bunch of headaches in return for 35% of the company. To date, Altria has written down 88% of the investment.
However, it appears the worst is over.
In its Q1 2021 results, Altria said that it had a $100 million (5 cents per share) non-cash pre-tax unrealized gain due to the fair-value increase in its Juul investment. Altrias shares have delivered a market-beating 22% total return in 2021.
As for the cannabis connection, Altria owns 43.5% of Cronos Group (CRON), one of the largest Canadian marijuana stocks. It also has warrants to acquire an additional 10% of the company, allowing it to control Cronos in the future.
In June, Cronos made a $110.4 million investment in PharmaCann. The investment gives it the right to buy 10.5% of the multistate operator (MSO) at some point in the future. It is a similar deal to the one Canopy Growth (CGC) struck for Acreage Holdings in 2019. It is dependent on Congress legalizing cannabis at the federal level. PharmaCann has cannabis operations in six states, including New York and Massachusetts.
In July, Altria agreed to sell its Ste. Michelle Wine Estates business to Sycamore Partners for $1.2 billion and the assumption of certain liabilities. The move is part of the companys plan to focus on smoking-related products that are healthier than cigarettes such as non-combustible vaping products offered by Juul Labs.
Investors shouldnt forget that Altria also owns 10% of Anheuser-Busch InBev (BUD).
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- Market value: $41.2 billion
In the same way, you can indirectly invest in cannabis by buying Altria shares; you can do the same by investing in Constellation Brands (STZ, $214.43), the purveyor of numerous beer, wine and spirits brands.
Thats because the company invested in Canopy Growth in 2017, buying a 9.9% stake for $191 million. It upped that stake to 36.6% in 2018 by investing $3.9 billion in the Canadian cannabis producer. In May 2020, it exercised the warrants it got in 2017, buying 18.9 million shares for $173.9 million, or $9.20 a share – about one-third where they traded less than a year later – to increase its stake to 38.6%.
It continues to hold warrants to exercise 88.5 million shares by Nov. 1, 2023, and 51.2 million by Nov. 1, 2026. If exercised, they would give it more than 50% ownership in the company.
The November 2018 warrants were modified by Canopy Growth in June 2019 to take into account its plans to acquire Acreage Holdings once federal legalization becomes a reality. As a result, it finished fiscal Q1 2022 with a $366 million increase in the fair value of its Canopy investments since its initial investment in 2017.
By aligning itself with Canopy, STZ provides itself with a fourth revenue stream that will grow exponentially with federal legalization. As long as Constellation continues to profit from its three existing revenue streams, investors can expect to be nicely surprised at some point by the companys investment in Canopy Growth.
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- Market value: $8.0 billion
If youre looking for a pure-play cannabis company in the U.S., Massachusetts-based Curaleaf Holdings (CURLF, $11.34) could be the way to go. The company got its start in New Jersey in 2010, developing one of the first vaporizers to administer a single measured medical marijuana dose. It grew from there.
Today, it operates in 23 states, including Arizona, Florida, Illinois and Massachusetts. It owns and operates 108 dispensaries, 23 cultivation sites, and 30 processing sites. And Curaleaf is becoming one of the worlds leading cannabis companies by using science to enhance the customer experience.
Thirty-six states, as well as Washington, D.C., Guam, and Puerto Rico, have legalized medical cannabis. Eighteen states and D.C. have legalized adult-use cannabis, with New York the latest to do so. As more states legalize adult use, Curaleaf will continue to grow its business organically and through acquisitions.
In May, Curaleaf acquired Los Suenos Farms, the largest outdoor growing operation in Colorado and one of the largest in the U.S. The facility covers 66 acres of cultivation capacity. It also has a 1,800-plant indoor grow facility and two retail cannabis dispensary locations.
The company paid $49 million for the companies, and an additional $18 million for the real estate. Approximately 61% was paid in Curaleaf stock, 29% in cash, and debt accounted for the remaining 10%.
Curaleaf finished Q2 2021 with record adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $84 million from $312.0 million in sales.
Be careful with CURLF, however. Like many marijuana stocks, Curaleaf is traded over the counter, sometimes at very thin volumes. That means limit orders and stop-losses are a must when investing. But for those willing to deal with the additional difficulty, CURLF could end up being one of the best marijuana stocks of 2021.
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- Market value: $2.7 billion
Cresco Labs (CRLBF, $9.99), like Curaleaf, is a multistate operator with operations in 10 states, sporting 44 retail licenses, 18 production facilities and 32 operational dispensaries. Its national brands include Cresco, Reserve, Remedi and Mindys (edibles).
Like many of the larger marijuana stocks, Cresco is growing its business through a combination of organic and acquisitive growth.
On April 12, Cresco announced the launch of Wonder Wellness: a line of low-dose edibles for the wellness-minded consumer. The line of gummies is currently available in Illinois but is expected to be available in all states where it operates soon.
Effect-forward, 5 mg gummies represent one of the largest market segments, and Wonder Wellness offerings address some of the most desirable consumer needs of relaxing, getting better sleep, and being happy, Chief Commercial Officer Greg Butler said in a company press release.
Cresco continues to grow its edibles portfolio to cater to market and consumer needs.
In terms of acquisitions, Cresco announced in April that it closed its all-stock purchase of Bluma Wellness, a vertically integrated operator in Florida. Cresco issued 15.9 million of its shares to pay for Bluma. It has 54,000 square feet of cultivation space producing ultra-premium quality flower and eight dispensaries located throughout the state.
Cresco reported record Q2 2021 revenues and adjusted EBITDA at the end of June. Sales jumped 123% over Q2 2021 to $210.0 million. Adjusted EBITDA of $45.5 million was 98% higher than in the second quarter of 2020. In addition, it reported a net profit of $2.7 million, 106% higher than it was a year ago.
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- Market value: $1.7 billion
GrowGeneration (GRWG, $29.08), the largest operator of hydroponic garden centers in the U.S., has been on quite the ride over the past year. Although it traded as high as $65 in February, it has since seen its share price cut in half. However, GRWG stock has roughly doubled annually on average over the past three years.
In July, GrowGeneration announced it would acquire HGS Hydro, a Michigan-based operator of hydroponic garden centers. With six stores open in Michigan and a seventh opening in the fall, HGS Hydro is the third-largest hydroponic retailer in the U.S. It generated $50 million in annual sales during 2020.
The U.S. currently boasts more than 1,000 hydroponic stores, but the market is highly fragmented. Including its most recent acquisition, GrowGeneration has 65 stores in 12 states with plenty of room for growth – its looking to expand in Missouri, Illinois, Arizona, Pennsylvania, New York and New Jersey. GRWG intends to have 60 stores in 15 states by the end of 2021, with that number swelling to 100 by 2023. (Youll notice that all its stores are in states where cannabis is legal for medical or recreational use.)
In the third quarter ended June 30, GrowGeneration had 60% same-store sales growth over Q3 2020. On the top line, revenue was 190% higher than a year ago, while net income rose 161% over last year to $6.7 million. It also raised its full-year sales guidance.
GRWG stock nonetheless fell a considerable amount on the news, as the company indicated its growth rate would decelerate during the second half of 2021. The bright side for new investors? Its valuation is far more reasonable heading into the fall.
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- Market value: $6.0 billion
Consolidation among marijuana stocks is getting busy in 2021 on both sides of the 49th parallel. In Canada, two of the largest cannabis producers merged in early May, making Tilray (TLRY, $13.26) that countrys second-largest behind only Canopy Growth.
While Tilray is the surviving moniker, in actuality, Aphria acquired Tilray in a reverse merger. Aphria CEO Irwin Simon leads the combined entity.
Tilray reported its fourth-quarter and full-year results at the end of July. Revenues rose 27% to $513 million, while its adjusted EBITDA jumped 598% to $40.8 million.
One of the post-merger highlights was Tilrays SweetWater Brewing division opening a Colorado brewery and SweetWater Mountain Taphouse at the Denver International Airport in July. SweetWater also launched 420 Imperial IPA. At the end of June, SweetWater partnered with the companys Broken Coast craft cannabis brand to launch Broken Coast B.C. Lager.
On the cannabis front, the companys German subsidiary, Aphria RX GmbH, completed its first German-grown cannabis harvest in early July. The product was grown at its 6,000-square-meter indoor grow facility in the German town of Neumünster.
The European medical cannabis market is estimated to reach $3.9 billion by 2025. Its CC Pharma distribution business in Europe is expected to play a vital role in grabbing significant market share.
In the Canadian adult-use market, Tilrays goal is to grow its market share from 16% today to 30% by 2023. As for the U.S. market, its SweetWater Brewing and Manitoba Harvest businesses will continue to grow market share in their respective segments of the marketplace until the federal legalization of cannabis opens up Tilrays full participation in the U.S. cannabis industry.
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Merida Merger I
- Market value: $162.7 million
On Aug. 9, 2021, Merida Merger I (MCMJ, $9.94) announced that it would merge with Leafly Holdings, a leading online information resource for cannabis consumers.
Merida Merger is a SPAC (special purpose acquisition company). It raised $120 million in November 2019 to use to combine with a cannabis-related business. The merged entity has an enterprise value of $385 million and an equity value of $532 million.
Merida has invested in the cannabis industry for more than a decade. The Non-Executive Chairman of Merida Merger is Mitchell Baruchowitz, founder and Managing Partner of Merida Capital Partners.
Leafly is based in Seattle. It operates a three-sided marketplace between itself, more than 125 million annual visitors (10 million monthly unique visitors) to its website and app, and 7,800 cannabis brands. Leafly is described as a non-plant-touching platform positioned to benefit from the acceleration of cannabis legalization in North America.
In February, Leafly partnered with Jane, a provider of e-commerce solutions for cannabis dispensaries, to provide a better buying experience for consumers while providing the dispensaries with real-time inventory updates between their online sites and in-store locations.
Leafly expects annual revenue of $43 million and $65 million in 2022, a growth rate of 52%. Its gross margins are very healthy at 88%. Leafly shareholders will own 72% of the merged entity.
The merger is expected to be approved in the fourth quarter of 2021.
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AdvisorShares Pure US Cannabis ETF
- Assets under management: $838.3 million
- Expenses: 0.74%, or $74 annually on a $10,000 investment
The AdvisorShares Pure US Cannabis ETF (MSOS, $33.72) launched in September 2020, and it already stood out enough to warrant a place among Kiplingers 21 best ETFs for 2021. What makes this fund stand out is its U.S.-specific focus; it holds a number of multistate operators such as Curaleaf and Cresco, the ETFs second- and third-largest holdings with weightings of 11.6% and 10.2%, respectively.
As more states legalize cannabis for medical or recreational use and as this fragmented industry evolves, (MSOs are) believed to be a growth opportunity based on their ability to develop operation, distribution, marketing, and research and development efficiencies in multiple states, AdvisorShares says.
The portfolio is managed by Dan Ahrens, who also happens to be AdvisorShares chief operating officer. Ahrens also manages the AdvisorShares Vice ETF (VICE), a fund dedicated to vice investments such as alcohol, tobacco and cannabis.
As pure-play, actively managed ETFs go, MSOS breaks the mold.
MSOS is the first and only actively managed U.S.-listed ETF with dedicated cannabis exposure focusing exclusively on U.S. companies, including multistate operators, AdvisorShares says. The portfolio manager allocates across an investable universe of U.S. companies spanning a variety of cannabis-related businesses.
Many investors dont want to take on the risk associated with investing in individual issues but like the idea of investing in smaller companies. MSOS allows those investors to enjoy a rising tide by providing access to a basket of roughly 30 of the best U.S. marijuana stocks out there.
Like many cannabis stocks in 2021, MSOS started out strong earlier in the year but has since come back to earth. The ETF has a total return of -7.6% in 2021.
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ETFMG Alternative Harvest ETF
- Assets under management: $1.2 billion
- Expenses: 0.75%
Almost anyone who invests or is interested in the cannabis industry knows the ETFMG Alternative Harvest ETF (MJ, $16.35).
Launched in December 2015, MJ was the first U.S. ETF targeting the global cannabis industry – which is expected to grow to $66.3 billion in annual revenue by 2025, from $11.4 billion in 2015. Since then, it has attracted roughly $1.4 billion in total net assets, making it the largest ETF focused on weed stocks.
Unlike MSOS, many of MJs top 10 holdings are Canadian cannabis investments, such as the aforementioned Canopy Growth and Cronos Group. The top 10 holdings account for almost 53% of its assets, with the remaining 22 stocks accounting for the rest.
The Prime Alternative Harvest Index looks to embrace a broad strategy that not only invests in companies that grow or manufacture cannabis-related products, as well as CBD stocks; it also invests in those businesses that are likely to benefit from increased cannabis use worldwide. For example, a company such as Scotts Miracle-Gro (SMG) will benefit from the sale of lawn care, gardening and hydroponics equipment to cannabis enthusiasts. It represents 2.9% of MJs total portfolio, putting it outside the top 10 holdings.
While future decriminalization of cannabis at Americas federal level would no doubt benefit its U.S. holdings, MJs Canadian investments would benefit significantly, too. For instance, Canopy Growth can buy Acreage Holdings should cannabis be legalized at the federal level.
The only downside of MJ is that its expense ratio is 0.75%. While thats just one basis point (a basis point is one one-hundredth of a percentage point) higher than MSOS, remember: MSOS is actively managed. This is an above-average price for a passive ETF, albeit one in a growth industry.
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