The best cannabis stocks are seeing a resurgence this month. There seems to be progress, coming at the direction of the Biden Administration, of getting the Drug Enforcement Agency to reschedule cannabis from a Class I to a Class III substance. That move would save cannabis companies millions of dollars in tax dollars because, thanks to IRS code 280E, no deductions are allowed for companies running businesses that sell Schedule I or II controlled substances.
The other driving force for cannabis stocks is there are now 24 states and the District of Columbia that allow recreational and medical marijuana sales, to go with the 14 that only allow medicinal sales, Ohio, through a voter referendum, just became the 24th state to legalize adult-sales of marijuana.
1. Glass House Brands: Best Cannabis Stock for Growth
Glass House has been able to succeed in one of the most difficult states for cannabis – California, where cannabis companies face high taxes and strong competition from an illicit market. The company, after adding three stores in the second quarter, operates 10 stores in the state and has seen its yearly revenue rise from $64.73 million in 2020 to $118.33 million last year. This year, even with a slower fourth quarter, the company is on track to have $185.44 million in revenue.
The company has been able to thrive by using low-cost production by building large greenhouses and benefiting from certain economies of scale. A big part of its business is wholesale sales. In the third quarter, the company said that it managed a record low production cost of $118 per pound.
The company released its third-quarter report on Nov. 13. The company reported record quarterly revenue of $48.2 million, up 71% year over year and 8% sequentially. The company also reported adjusted EBITDA of $10.7 million, compared to $9.5 million in the second quarter and an adjusted EBITDA loss of $2.7 million in the same period a year ago.
One negative is the company reduced guidance slightly, citing poor growing conditions in the fourth quarter, but still, Glass House said it expects fourth-quarter revenue to be between $38 million and $40 million, up 21%, year over year but down 19% from the third quarter.
2. Innovative Industrial Properties: Best Cannabis REIT Stock
Innovative has a diversified portfolio of cannabis tenants, with not one of them representing more than 16% of the company’s annualized rent. The company owns 108 properties across 19 states, with approximately 8.9 million rentable square feet. Five of the properties are still under construction.
The company is a model of consistency. Its leases are designed as triple-net leases that generally exceed 15 years. In the third quarter, it collected 97% of contractually due base rent and property management fees.
Its tenants pay the taxes, maintenance and insurance on the properties, which provide a steady revenue stream with little risk. While high interest rates have made it harder for REITs to expand and made other high-yield investments more attractive, the company’s strength makes it a good long-term investment.
In the third quarter, reported on Nov. 1, the company said it had revenue of $77.8 million, up 10%, year over year. Adjusted funds from operations (AFFO) is a better metric for REITS than net income in showing profitability and Innovative’s AFFO per share was $2.29, up 7.5%, compared to the same period last year.
Since it began delivering a quarterly dividend in 2017, the company has increased it by 1,100%, including a 2.8% bump last year to $1.80, which offers a current yield of around 9.6%. Even with that high dividend, the payout ratio is only 79%, which isn’t high as REITs are expected to return 90% of taxable income to shareholders.
As the largest cannabis REIT, the company stands to grow as the business grows. Even if some of its tenants struggle, the company should be able to lease the properties to other cannabis retailers.
3. Green Thumb Industries: Best Cannabis Stock for Consistent Profitability
Green Thumb is coming off a record quarter for revenue. The company reported $275 million in revenue in the third quarter, up 9%, sequentially and 5.4%, year over year.
Unlike most MSOs, the company continues to be profitable as it had $11 million in net income, or $0.05 in earnings per share (EPS), compared to net income of $9.8 million or EPS of $0.04 in the third quarter of 2022. Over the past five quarters, the company has reported positive net income in four of them. The company has made its shares more valuable, recently announcing a $50 million share buyback program.
Green Thumb, which has 87 dispensaries across 15 states, has been able to manage its growth while staying profitable. It was able to take advantage of Maryland’s adoption of adult-use sales and should be, with the maximum of five dispensaries in Ohio, be able to do the same in the Buckeye state, particularly since it is a limited-license state.
As of the third quarter, it had only $161,699 in net debt, so it is in a good position to increase its market share. Over the past four years, it has increased yearly revenue by 154%. The company has turned a profit in four of its past five quarters.
4. Verano Holdings: Recording Record Revenue, Thanks to Wholesale Revenue
The company’s sales extend well beyond its dispensaries as its brands are sold in more than 700 locations across the U.S. and 33% of its revenue comes from wholesale sales. The company said it plans to have more than 140 locations.
Verano Holdings recently raised its guidance for yearly free cash flow after record revenue of $240 million in the third quarter, up 5%, year over year and 2% sequentially. The MSOisn’t profitable, but it trimmed its net income loss to $18 million, compared to an net loss of $43 in the third quarter of 2022. Verano improved quarterly earnings before interest, taxes, depreciation and amortization (EBITDA) by 24.9%, year over year to $89 million.
Verano now says it expects yearly free cash flow to be between $72 million and $76 million, compared to earlier guidance of between $65 million to $75 million.
Some of the driving forces for the growth are improved wholesale revenue and successful new product launches, including more than 100 new products over the past year, the company said. The launch of adult-use sales also helped revenue, along with good wholesale sales in Connecticut.
5. Curaleaf: Best Cannabis Stock for Strong Revenue, International Scope
Curaleaf operated 146 dispensaries across 17 states, as of the third quarter. It has been prioritizing cost reductions and improved inventory, though the results haven’t born fruit yet.
In the third-quarter report, which it issued on Nov. 8, the company said it had revenue of $333.2 million, up 2%, year over year. Through nine months, Curaleaf has already surpassed $1 billion in revenue. It isn’t profitable, and reported a net loss of $92.3 million, or $0.13 in EPS loss, but the company’s sheer size makes it worth looking at. The company is also looking to increase its presence with a listing on the Toronto Stock Exchange.
Some of the growth areas for the company include Ohio, Florida, Pennsylvania and Germany. The company is the largest vertically integrated MSO in Europe, thanks to its $286 million purchase of EMMAC Life Sciences Group in 2021.
6. TerrAscend: Popular Cannabis Stock for Contrarian Investors
TerrAscend is small, with 38 dispensaries across five states. It has made the most of its acquisitions in recent years. In 2023, it bought four dispensaries in Maryland, the year before, it bought five in Michigan and in 2021, it bought three dispensaries to give it a presence in Pennsylvania.
The company reported third-quarter revenue of $89.2 million, up 34.7%, year over year and 23.7% sequentially. It grew adjusted EBITDA by 89% over the second quarter and trimmed its net losses dramatically. It reported a net loss of $8.4 million in the quarter, compared to a loss of $12.9 million in the second quarter and a net loss of $300.6 million in the same quarter a year ago. The company has reported positive cash flow for five consecutive quarters from continuing operations.
The optimism spreads to updated guidance. TerrAscend said that it expects annual revenue to be $320 million and annual adjusted EBITDA of $73 million, compared to earlier guidance of $317 million in 2023 revenue and $63 million in 2023 adjusted EBITDA.
7. Tilray Brands: A Great Cannabis Stock for Diversification
Tilray Brands is a Canadian cannabis retailer, but thanks to its U.S. craft brewing business, is in a unique position to jump into the U.S. market once federal decriminalization happens. In the meantime, the company continues to grow revenue. In the first quarter of fiscal 2024, Tilray reported revenue of $177 million, up 15%, year over year.
Thanks to its recent purchase of Hexo, the company grew its No. 1 share in Canadian cannabis sales to 13.4%. Tilray led Canada in sales of cannabis flower, oils, concentrates and THC beverages. The company is also the leading retailer of medicinal marijuana in Europe.
While not profitable, Tilray is improving its profitability. In the quarter, it said it had a net income loss of $56 million, compared to a net loss of $66 million in the same quarter last year. EPS was reported as a loss of $0.10, compared to an EPS loss of $0.13 in the first quarter of 2023.
Thanks to a recent acquisition of eight craft beer and beverage brands from Anheuser-Busch, it is the fifth-largest U.S. craft beer brewer. If cannabis is federally legalized in the U.S., Tilray would be able to use its beer brands to make products with tetrahydrocannabinol, the main ingredient in pot. The move also sets up the company for a distribution network in the U.S. that it would be able to use to sell cannabis, if legalized.
8. Jazz Pharmaceuticals: Best Non-Pure Play Cannabis Stock for Growth
Jazz is a pharmaceutical company first, but Epidiolex, its cannabidiol therapy to treat seizures in various indications, is helping drive the company’s gains. In the third quarter, Jazz reported revenue of $972 million, up 3%, year over year.
Epidiolex revenue alone was $213.7 million, up 9% over the same period last year. The company also grew net income to $146.8 million, or $2.14 in EPS, compared to a loss of $19.7 million last year or an EPS loss of $0.31.
However, Epidiolex isn’t the biggest seller as narcolepsy therapy Xywav had $332 million in sales, up 30%, year over year. Cancer drug Rylaze, which was just launched in mid-2021, also saw a sales rise of 43% over the same period last year, to $105 million.
The company has a fairly large pipeline, with an emphasis on neuroscience and oncology therapies. It has 17 programs in clinical trials and several preclinical programs.
Jazz’s guidance points to a return to net income and EPS growth, after two years of unprofitability. The company is predicting yearly net income of between $450 million and $565 million, compared to a loss of $224.06 million in 2022 and yearly EPS to be between $6.60 and $8.15, compared with a loss of $3.58 in 2022 EPS.
9. Ascend Wellness: Under-the-Radar Cannabis Bargain
Ascend Wellness, using the price-to-sales metric, is the lowest priced stock on this list, with a P/S ratio of 0.476. That means, to me, that investors haven’t caught on to how much potential this pure-play cannabis stock has.
The MSO has six in-house brands and operates 31 dispensaries across Illinois, Michigan, Ohio, Massachusetts, New Jersey, Pennsylvania, and Maryland. The company has increased revenue for six consecutive quarters. In the third quarter, it reported revenue of $141.3 million, up 27%, year over year and 14.9% sequentially. The company also narrowed its net loss to $11.2 million, compared to $16.9 million in the same period a year ago.
The improved profitability was driven by growth in wholesale and retail sales, thanks in a big part to adult-use sales beginning in Maryland and margin improvements in the company’s wholesale businesses in Massachusetts and New Jersey. The company has been financially prudent and its net debt is only $243.5 million.
The company has had a leadership shakeup this year, with a new CEO, John Hartmann, joining Ascend in May. He recently promoted Mark Cassebaum to Chief Financial Officer and appointed Chris Holzer as the company’s Chief of Operations.
NewLake Capital Partners is a much smaller cannabis REIT than Innovative Industrial Properties, with 32 properties across 12 states. The company was founded in 2019 and went public with an initial public offering in 2021. One advantage NewLake has, though, is a superior dividend that it increased by 5.4% last year to $0.39 per quarterly share, which has a payout ratio of 81.6%, considered safe for a REIT.
While two of its tenants, Revolutionary Clinics and Calypso, have had recent financial difficulties, those seem to be resolved for now and NewLake has continued its upward momentum. Through nine months, the company reported revenue of $34.3 million, up 4.7%, year over year.
It also reported FFO of $28.6 million, up 15.8% over the same period last year and AFFO was $27.8 million, up 7.7%, year over year. The companies’ properties are 100% leased, with triple-net leases, with an average remaining lease term of 14.2 years.
The company’s guidance points to another year of growth. It said it expects full-year AFFO of between $39.8 million to $40.8 million, up 4.1% at the midpoint of the range.
The company has also helped investors by keeping its share price high with stock repurchases. In the third quarter, the company bought back 608,152 shares of its stock and has plans to buy back an additional $10 million worth of stock by the end of 2024.
Why Invest in Cannabis Stocks?
All cannabis companies are in the early stage of their growth cycles, presenting a great opportunity for investors, with a caveat. The risk is quite high as well. With the industry so new and so few companies showing a profit, it’s hard to tell if a particular stock is priced too high – or too low.
However, if you do find the right cannabis stock, it is likely to benefit from trends that point to legal cannabis sales growing at high levels over the next decade. New Frontier, a cannabis research firm, expects $72 billion in total U.S. legal cannabis sales by the end of the decade. The rise is expected to be aided by government funding and an increasing emphasis from companies on treating and potentially curing genetic disorders.
How We Ranked The Top 10 Cannabis Stocks
Even with more states opening to allow medicinal and recreational marijuana use, there’s likely to be a shakedown in the industry that leaves all but the most successful companies. With that in mind, we measured cannabis stocks by several factors:
The most attractive thing about investing in cannabis stocks is the potential for growth. The best way to measure that is if a company is steadily increasing revenue. It hasn’t been easy for some because the glut of cannabis has led to price compression, but the companies that continue to show growth will be more likely able to survive.
We measured this in two ways, if a company is increasing revenue sequentially, that is, in each quarter, and, because cannabis sales tend to be cyclical, whether they are boosting revenue, year over year, that is, comparing one quarter to the same quarter in the prior year.
Profitability and Earnings
Most cannabis companies aren’t profitable. The industry is so new, and the focus is so much on growth, that cannabis companies often have a net income loss each quarter. However, that’s not a trend that can continue forever and we sought companies that are either showing positive net income or are at least getting closer to showing positive net income. To do this, we looked at a company’s net income figures as well as their adjusted EBITDA numbers.
Balance Sheet Strength
It’s not enough to just be increasing revenue. Some companies’ level of debt and their amount of cash so low, that they’re headed for trouble. We looked for companies with less net debt compared to their peers. The companies that will survive will need to have enough cash reserves to buy other companies and property to grow.
We looked at cannabis companies that used their resources well to make products and generate revenue. The companies that were able to reduce waste, improve their processes and streamlined their operations, are the companies more likely to be profitable in the long run.
Handling Compliance Issues
Cannabis companies, particularly MSOs, have to deal with fragmented regulatory landscapes. Not only does each state have its own regulations regarding cannabis sales, but some states have separate agencies to report to and cannabis companies have to keep track of local laws as well. It’s something that cannabis companies have to keep on top of, because these laws and regulations continue to change.
Companies that establish standard operating procedures, especially involving compliance reporting, are less likely to run afoul of regulators and that means avoiding costly fines or worse, having a license revoked.
Are There Cannabis ETFs?
Several cannabis ETFs can give you a wide range of exposure across cannabis stocks. However, just like the nascent industry, there’s still plenty of risk associated with cannabis ETFs, particularly since the sector has been in decline over the past few years, due to regulatory uncertainty, changing laws and financial difficulties associated with a new industry.
Some of the top ETFs this year include: the AdvisorShares Pure US Cannabis ETF (NYSEMKT: MSOS), which is down less than 7% this year and has an expense ratio of 0.83%, the Roundhill Cannabis ETF (NYSEMKT: WEED), which is down less than 9% this year and has a low expense ratio of 0.39% and the ETFMG U.S. Alternative Harvest ETF (NYSEMKT: MJUS), which is down more than 20% and has an expense ratio of 0.75%.
Where to Get Cannabis Stock Tips
There’s no substitute for looking at the quarterly reports for leading cannabis companies to see which companies are growing revenue and improving profitability. It’s also useful to see which cannabis stocks whose stock prices are rising and benefiting from market trends.
To do that, consider using AltIndex – a top alternative data provider. Read on to find out how AltIndex can help you become a successful cannabis investor in 2023.
AltIndex Review – AI Stock Picks and Insights for Cannabis Stocks
AltIndex, a subscription service that uses artificial intelligence (AI) and alternative data, can be useful in choosing cannabis stocks that will outperform competitors. AltIndex uses a variety of data to help investors narrow down their choices among cannabis companies.
First, the company continually updates its list of Best Cannabis Stocks, based on price change, the company’s AI score, which is based on different metrics, such as business outlook, app downloads, stock sentiment and webpage traffic. The score is calculated with advanced algorithms that help rank cannabis stocks. The stocks’s AI score can range from 0 to 100 based on market sentiment, with higher scores meaning better buys.
The company also provides news on particular cannabis stocks and a stock screener that can rank each stock based on various metrics.
AltIndex’s starter plan costs $29 per month and that comes with 10 AI stock picks every month. To use the services’ more advanced features, the pro plan costs $99 a month and provides 25 AI stock picks every month.
Investing in cannabis stocks isn’t for the weak of heart, as the industry has seen wild market swings the past few years, depending on the price of cannabis and which way political winds seem to be leaning. It’s also worth noting that many cannabis stocks trade over the counter and OTC stocks can be riskier than traditional stocks. OTC companies aren’t held to the same reporting standards set out by the SEC as stocks listed on major exchanges.
However, it makes sense for investors to have at least some exposure to the industry. For one, cannabis stocks have a low rate of correlation to traditional asset classes, so they provide portfolio diversification to a new industry. As already stated, it’s not whether growth is coming to cannabis, but how much. Well-managed cannabis companies have a chance to get in on the ground floor of the industry and deliver solid long-term returns for investors.