Cannabis investors have been waiting for a surge in marijuana stocks since the end of 2017. So far, they have gotten nothing but false starts.
But investors that hold the industry’s best stocks and the best exchange-traded funds (ETFs) – and perhaps a bit more patience – should be best-positioned for marijuana’s renaissance.
The Prime Alternative Harvest Index, which tracks the performance of some of the cannabis industry’s most prominent companies, is working on its fifth consecutive calendar year with double-digit negative returns. Perhaps worse: A $10,000 investment in the index at its inception on Dec. 18, 2017, would today be worth around $3,200.
Amazingly, while marijuana stocks haven’t delivered the long-term returns investors have yearned for over the past five years, the cannabis industry in the U.S. is extremely healthy – and that’s despite a continued delay in federal legalization. You can thank a growing number of forward-thinking states such as New Jersey, which legalized recreational-use marijuana on April 21.
In 2022, estimates put U.S. legal cannabis sales at $33 billion – up 32% from 2021 – and $52 billion by 2026. The economic impact is expected to be even more significant.
“While federal legalization flounders in Washington, D.C., the American cannabis industry’s economic impact could near $100 billion by end of 2022 and nearly $158 billion by 2026,” Fortune reported Jenel Stelton-Holtmeier, editor of MJBiz Factbook, tells Fortune. “This means that for every $1 consumers and patients spend at adult-use stores and dispensaries, an additional $1.80 will be injected into the economy, much of it on a local level.”
The long-term prognosis for the cannabis industry is excellent. Ultimately, the following 10 picks look like the best marijuana stocks (and funds) to benefit from this ongoing growth and maturation.
Data is as of April 28.
- Market value: $5.6 billion
Believe it or not, one of your favorite garden supply brands is also a way to invest in cannabis.
Scotts Miracle-Gro (SMG, $101.35) made a big splash in the medical marijuana market in late March when affiliates of the company acquired Etain Health, one of New York state’s original medical marijuana producers.
With the state legalizing recreational sales expected later in 2022 or early in 2023, the $247 million cash-and-stock acquisition gives the Ohi0-based maker of lawn care and gardening products more direct participation in the cannabis industry. In addition, the company’s mergers-and-acquisitions specialist, Mark Sims, will become CEO of Etain, pushing aside its founders.
Before Scotts invested in Etain, Raymond James analyst Joseph Altobello lowered his price target on SMG to $150 from $185. Altobello cut the target price by $35 because Scotts cut its 2022 growth estimates for its Hawthorne hydroponics business. It now expects Hawthorne’s sales to fall by 25% this year.
However, Altobello still rates Scotts a Strong Buy – and believes shares still have 48% upside over the next 12 months.
“Our Strong Buy rating on the shares of Scotts Miracle-Gro reflects our view that the gains made by its U.S. Consumer segment during the COVID-19 pandemic should prove largely sustainable, while its Hawthorne hydroponics business is well-positioned for long-term growth despite near-term headwinds,” Altobello said in March. “Further, valuation remains very attractive, as it seems investors are essentially getting Hawthorne for free.”
That valuation has admittedly become even more attractive, given that SMG shares have been caught up in the market’s recent downturn and shed another 20% of its price.
British American Tobacco
- Market value: $95.3 billion
British American Tobacco (BTI, $41.84) is best known for cigarette brands such as Lucky Strike, Camel, Pall Mall, Rothmans, and Dunhill. However, the U.K.-based company also has developed non-combustible products such as Vuse vaping products, Velo nicotine pouches and Glo tobacco heating products. The company expects these “New Category” products to reach 5 billion British pounds (or $6.4 billion) by 2025.
BTI is also a global player. It currently generates 45% of its revenue from the U.S., 23% from Europe and North Africa, 16% from Asia/Pacific and the Middle East, and 15% from the Americas and Sub-Saharan Africa.
However, the company’s 19.5% ownership stake in Canada cannabis producer OrganiGram Holdings (OGI) is what has BTI on this list of marijuana stocks. In March, BTI invested $5.1 million in OrganiGram, upping its position from its original C$220 million ($172.4 million) in 2021.
“Innovation is an important cornerstone of Organigram’s core strategy, and the Product Development Collaboration with BAT underscores our commitment to the development of disruptive, consumer-focused cannabis products,” Organigram CEO Beena Goldenberg said in a statement.
In March, Argus Research David Coleman reiterated his Buy rating and $50 price target on BTI shares.
“We believe that BTI shares offer value and like the high dividend yield,” he says; that yield is 8.8% at current prices.
Coleman believes British American Tobacco will earn $4.90 a share in 2022 and $5.20 in 2023. BTI’s shares currently trade at 8.5x projected 2022 earnings, below its five-year historical average.
In the future, if the cannabis industry rises off the mat, BTI would likely up its stake in OrganiGram, possibly acquiring it outright. But, as Coleman says, BTI is a good marijuana stock to hold if you’re a value investor who likes healthy dividends.
Innovative Industrial Properties
- Market value: $4.2 billion
Innovative Industrial Properties (IIPR, $150.78) is a real estate investment trust (REIT) that invests in greenhouses and industrial facilities for the medical cannabis industry. It was founded in 2016, when it had just one property under its umbrella; that expanded to 66 by the end of 2020, and it currently boasts 105.
The REIT’s diversified portfolio spans 19 states. Nine of them – including Illinois, California, and Pennsylvania – account for almost 90% of its 7.9 million square feet of rentable space.
In April, IIPR acquired a property in Maryland with 84,000 square feet of industrial and greenhouse space for $25.0 million. This exemplifies the REIT’s business model: The seller, Maryland Cultivation and Processing, then entered into a long-term, triple-net lease. It intends to use the facility for cultivating cannabis.
Piper Sandler analyst Alexander Goldfarb gives the REIT an Overweight rating (equivalent of Buy) with a $230 target price, some 53% higher from current levels. In 2022, Goldfarb estimates its adjusted funds from operations (AFFO, an important measure of REIT profitability) will be $8.71 a share and $10.57 a share in 2023.
“Assuming the eventual federal legalization, IIPR retains the advantage of being the dominant cannabis landlord, who understands all facets: tenants, zoning, utilities, security, etc,” Goldfarb says.
- Market value: $100.1 billion
Marlboro parent Altria (MO, $55.20) 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 -0.15%, considerably less than the 13.3% total return for the entire U.S. market. On the other hand, its annualized total return over the past 52 weeks is 24.5%, considerably higher than -2.1% for the entire U.S. market.
So if nothing else, it’s building a little momentum.
Stifel, which in April produced a tobacco-industry outlook, said it believes Altria has a strong profit outlook due to rising prices. Accordingly, it has a Buy rating on the stock, with estimated 2022 earnings of $4.87 a share. Further, its reduced-risk products should continue to deliver strong earnings in 2023 and beyond. Accordingly, it raised its Altria target price to $60.
“The company’s aggressive approach to share repurchases (we model $2 billion this year) and the 6.6% dividend yield support strong upside potential for the shares, in our view,” Stifel’s April 19 report stated. (Altria now yields 6.5%.) “We believe a solid first-quarter performance, progression toward more consistency in its earnings, and a potential improvement in its future growth profile (reduced-risk products) support continued upward movement for the share price from this level.”
As for its spot among the market’s top marijuana stocks? Altria owns 45% of Cronos Group (CRON), a large Canadian marijuana firm. It also has warrants to acquire an additional 10% of the company, allowing it to control Cronos in the future. These warrants expire on March 8, 2023, so there is a possibility Altria will control Cronos by this time next year.
Investors shouldn’t forget that Altria owns 10% of Anheuser-Busch InBev (BUD).
- Market value: $46.5 billion
Another indirect play among our best marijuana stocks is Constellation Brands (STZ, $250.18), the purveyor of numerous beer, wine and spirits brands.
The company invested in Canopy Growth (CGC) in 2017, buying a 9.9% stake for $191 million. In 2018, it upped that stake to 36.6% by plunking down another $3.9 billion into the Canadian cannabis producer. In May 2020, it exercised the warrants it received in 2017 to buy another 18.9 million shares for $173.9 million, increasing its stake to 38.6%.
Constellation continues to hold warrants to exercise roughly 88.5 million shares by Nov. 1, 2023, and nearly 51.3 million by Nov. 1, 2026. If exercised, they would give STZ more than 50% ownership in Canopy Growth.
By aligning itself with Canopy, STZ provides 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 have a chance of eventually being nicely surprised by the company’s investment in CGC. And as of now, it is indeed profiting. Constellation Brands reported results for its fiscal 2022 fourth quarter on April 7. Revenues of $8.8 billion were up 2% year-over-year, and diluted earnings per share (EPS) excluding Canopy’s losses were $10.99, up 5%.
It might take longer than expected to realize the benefits of Constellation’s original 2017 investment, but it’s hardly out of the picture.
- Market value: $4.3 billion
If you’re looking for a pure-play cannabis company in the U.S., Massachusetts-based Curaleaf Holdings (CURLF, $6.09) 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.
As mentioned earlier, adult-use cannabis sales in New Jersey were legalized for customers 21 and older in late April. Curaleaf began selling recreational marijuana from its Bellmawr dispensary, with plans for its other two New Jersey dispensaries to follow shortly after.
CURLF operates in 23 states, including New Jersey, Arizona, Florida, Illinois and Massachusetts. It owns and operates 128 dispensaries and 26 cultivation sites. And Curaleaf is becoming one of the world’s leading cannabis companies by using science to enhance the customer experience.
A total of 37 states, as well as Washington, D.C., and four territories have legalized medical cannabis. Eighteen states, D.C. and Guam have legalized adult-use cannabis. As more states legalize adult use, Curaleaf should be able continue to grow its business organically and through acquisitions.
Curaleaf finished 2021 with $1.2 billion in sales, which filtered down to adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $298 million – 107% better than the year-ago sum.
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.
- Market value: $1.4 billion
Cresco Labs (CRLBF, $4.65), like Curaleaf, is a multistate operator with operations in 10 states, sporting 51 retail licenses, 21 production facilities and 49 operational dispensaries. Its national brands include Cresco, Reserve, Remedi and Mindy’s (edibles).
Like many of the larger marijuana stocks, Cresco is expanding its business through both organic and acquisitive growth.
On March 23, the company announced a transformational deal to acquire Columbia Care in an all-stock transaction worth $2 billion. Shareholders will receive 0.5579 Cresco shares for every share held in Columbia. Cresco pays a 19% premium on its 20-day volume-weighted average price (VWAP). The transaction is expected to be completed in the fourth quarter.
Once Columbia Care is in the fold, Cresco will be the largest multi-state operator (MSO), with more than $1.4 billion in pro forma revenue from more than 130 retail locations in 18 markets.
“On a pro forma basis, the combined Company will be the largest cannabis company by revenue, the No. 1 wholesaler of branded cannabis products, and the largest nationwide retail footprint outside of Florida,” says Charles Bachtell, CEO of Cresco Labs.
This is one of Wall Street’s favorite marijuana stocks, with 15 of the 18 analysts covering it calling it a Buy or Strong Buy. An average target price of $13.40 implies the stock will nearly triple over the next 12 months.
- Market value: $2.5 billion
About a year ago, Tilray (TLRY, $5.11) merged with Aphria to form Canada’s second-largest licensed cannabis producer behind only Canopy Growth. Since then, Tilray’s shares have lost 70% of their value.
While Tilray is the surviving moniker, in reality, Aphria actually acquired Tilray in a reverse merger, with Aphria CEO Irwin Simon leading the combined entity. Over the past year, he has been busy preparing the company for whatever happens at the federal level regarding adult-use legalization.
Simon recently appeared on CNBC to discuss the company’s potential expansion in the U.S. Key points made by Simon included the prediction Europe will legalize cannabis in the next 12 months and that Tilray will be cash flow-positive in fiscal 2023.
As for the U.S., he would like to see the company generate $1.5 billion in annual revenue in this market. However, that won’t come until the federal government legalizes cannabis.
The company’s most recent news centers around its strategic partnership with Quebec-based cannabis producer Hexo (HEXO). The two companies, via an agreement that became official in mid-April, hope to save $80 million annually in cost synergies.
Under the terms of the agreement, Tilray acquired Hexo’s remaining senior convertible debt of $193 million. Tilray can convert that debt into equity at 67 cents per share. The debt pays 5% interest. In addition, Hexo will pay Tilray $18 million a year for advisory services. If converted to equity, Tilray would own 35% of Hexo.
Despite the federal government dragging its heels on the legalization front, Simon is doing his best to position it for the future. Canaccord Genuity analysts are among the believers, upgrading TLRY stock to Buy from Hold in early March, with a $9 target price.
AdvisorShares Pure US Cannabis ETF
- Assets under management: $796.4 million
- Expenses: 0.73%, or $73 annually on a $10,000 investment
The AdvisorShares Pure US Cannabis ETF (MSOS, $16.08) launched in September 2020. This fund stands out because of its U.S.-specific focus; it holds several multistate operators, such as Curaleaf and Cresco, the ETF’s third- and fifth-largest holdings with weightings of 12.2% and 8.3%, respectively.
The portfolio is managed by Dan Ahrens, who also happens to be AdvisorShares’ chief operating officer. Ahrens also manages two other ETFs: the AdvisorShares Vice ETF (VICE), a fund dedicated to vice investments such as alcohol, tobacco and cannabis; and the AdvisorShares Pure Cannabis ETF (YOLO), an actively-managed fund that invests in both domestic and foreign cannabis stocks.
As pure-play, actively managed ETFs go, MSOS breaks the mold.
“U.S. MSOs possess an unusual set of attributes for such an early-stage industry in that they have among the highest growth rates of any sector, are generating substantial increases in EBITDA dollars, but have balance sheets capable of sustaining capex and funding M&A that we expect to fuel growth for the next few years,” say Needham analysts Matt McGinley and Chad Britnell.
While 2022 hasn’t been a good year for cannabis stocks or ETFs – MSOS is down 38% year-to-date – the possible future passage of the Secure and Safe Enforcement (SAFE) Banking Act will be extremely positive for the struggling industry, and publicly traded marijuana stocks and ETFs such as MSOS.
It’s down, but it’s not out.
ETFMG Alternative Harvest ETF
- Assets under management: $573.8 million
- Expenses: 0.75%
Almost anyone who invests or is interested in the cannabis industry knows the ETFMG Alternative Harvest ETF (MJ, $8.30).
Launched in December 2015, MJ was the first U.S. ETF targeting the global cannabis industry, which is expected to grow by 26.7% annually to $70.6 billion in annual revenue by 2028.
Unlike MSOS, many of MJ’s top 10 holdings are Canadian cannabis investments, such as Tilray, Sundial Growers (SNDL), Canopy Growth and Cronos Group. The top 10 holdings account for 57% of its assets, with the remaining 25 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, the aforementioned Scotts Miracle-Gro benefits from selling lawn care, gardening and hydroponics equipment to cannabis enthusiasts. It represents about 2% of MJ’s total portfolio, putting it outside the top 10 holdings.
The only downside of MJ is that its expense ratio is 0.75%. While that’s just two basis points (a basis point is one one-hundredth of a percentage point) higher than MSOS, remember: MSOS is actively managed. So this is an above-average price for a passive ETF, albeit one in a growth industry.
Of course, it’s certainly worth the cost in 2022. MJ is faring well compared to its actively managed competitor this year, down just 25% – 13 percentage points better.