Marijuana stocks have been on a wild ride lately. For a while, the sector had been in freefall. The initial optimism from Canada’s legalization turned into a brutal bear market as that country’s retail sales market underwhelmed.
Now though, pot stocks are back on the upswing. They took part in the big short squeeze trend back in January. And, aside from that, the rapid legalization of marijuana in individual U.S. states is adding far more momentum to the trade as well.
That said, not all marijuana stocks are created equal. And, with the huge short squeezes, companies’ valuations changed dramatically in the span of a few weeks. As such, it’s worth sorting through seven of the leading marijuana companies. Here’s where they stack up starting with the best and moving on to the much less impressive:
- Trulieve (OTCMKTS:TCNNF)
- Green Thumb Industries (OTCMKTS:GTBIF)
- Clever Leaves (NASDAQ:CLVR)
- Canopy Growth (NASDAQ:CGC)
- Innovative Industrial Properties (NYSE:IIPR)
- Tilray (NASDAQ:TLRY)
- Sundial Growers (NASDAQ:SNDL)
If you primarily deal in Canadian marijuana companies, you might think of the industry as being loss-making and having poor financial results. And that’d be true, as far as most of the Canadian pot plays go.
However, don’t miss out. In the United States, you already have a bunch of marijuana companies that are making money and have good balance sheets. That’s right; the industry has progressed rapidly since 2018 and there are far more attractive investment candidates now than there were then. Marijuana stocks may have been a “bubble” at one point, but numerous companies are starting to deliver real compelling results.
These companies are starting to get more mainstream attention as well. Leading financial publication Barron’s pitched the “big four” U.S. marijuana stocks earlier in February. Previously, that organization has generally steered clear of the U.S. pot stocks, so it’s a significant sign of growing mainstream adoption.
What’s the best of the four? I’d argue that Trulieve is one to watch. Trulieve has massive market share in the Florida market, and it operates in a few other states as well. It has been consistently profitable since 2017 and generates positive free cash flow as well. That’s much different from its Canadian rivals. Trulieve should be able to continue growing at a rapid clip as its home Florida market ripens and it adds on more stores in other states as well.
Green Thumb Industries (GTBIF)
Green Thumb is another of the profitable big four American marijuana names. Well-known fund manager Bill Miller took a large position in GTBIF stock recently. Miller says it’s his top pick in the sector and that it could “easily” grow at 20-25% a year for the next decade.
Green Thumb scored another big win in February as well. It managed to sell stock to an institutional investor in the U.S. That might not seem like a big deal. In the past, however, marijuana companies operating in the U.S. have been barred from issuing stock due to marijuana being illegal on a federal level.
However, the tide is turning. The Securities and Exchange Commission (SEC) gave Green Thumb the go-ahead to sell stock in the U.S., paving the way for more growth and easier access to capital going forward.
And Green Thumb should have plenty of growth ahead of it. It has grown revenues at a scorching rate in recent years. That’s thanks to an integrated supply chain. It cultivates marijuana, processes and distributes it, and then operates its own retail stores as well. With more states coming online, a multi-state player like Green Thumb is set to prosper.
Clever Leaves (CLVR)
Clever Leaves is another interesting marijuana grower. This is a newer public offering, and thus might be less familiar for many of you. However, Clever’s differentiating feature is that it has acquired a great deal of land in the nation of Colombia to grow marijuana.
Clever has seemingly realized that, in the end, marijuana is largely going to be a margins game. If you can grow product more cheaply than your competition, you’re going to make more money. Some of the Canadian growers have tried to differentiate on product quality, potency and branding. However, so far, it seems that, in general, the lower operating cost companies have delivered better results. In a brutally competitive market, being the lowest-cost producer is always a defensible position.
By setting up the growing operations in Colombia, Clever should have a huge advantage on North American peers. You have at least four perks for Clever. Land is cheap in Colombia, as is the cost of labor for tending the crops. The weather is better, necessitating less spending on electricity. And, thanks to growing at high altitude, you avoid some problems with pests that you’d have in different terrain.
I’ve always been skeptical of the economics of growing cannabis in Canada, given the harsh climate there. It seems Clever has come to the same conclusion that I did. Clever is still in the early stages of getting its business up and running, and it will still be a matter of time before we see how commercially successful it ends up being.
However, this is one to keep your eyes on.
Canopy Growth (CGC)
CGC stock is still one of the clear leaders in the marijuana space. It got off to a hot start back in 2018 thanks to a huge investment from alcoholic drinks company Constellation Brands (NYSE:STZ). Canopy was able to use that cash and prestige to build a substantial first mover advantage.
However, it has struggled to turn that momentum into operating results. Like most of the rest of the Canadian marijuana companies, Canopy continues to lose money. The oversupply of marijuana in Canada is simply too steep for most firms to find traction yet.
That said, Canopy is still huge — it has a massive market capitalization and decent balance sheet. Its operating losses, by contrast, are fairly small. Canopy has plenty of time and strength to navigate the shifting marijuana market and political changes. CGC stock is hardly going to be the best pick in the space, but it’s a fine steady choice for longer-term investors in cannabis.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties is an interesting one. For those unfamiliar, IIPR stock represents a much different business model than the rest of this list. Rather than growing cannabis directly, or processing it into pharmaceutical and commercial products, it owns places where other people grow cannabis. Thus, it’s a real estate investment trust (REIT), except for marijuana growing instead of the usual offices, apartments, shopping centers or what not.
Niche REITs such as this have a mixed track record. However, IIPR stock has been a home run, at least so far. It has been able to earn highly attractive returns, scoring double-digit annual rates on leasing properties whereas the market for other real estate such as offices and warehouses yields far less. If things keep going as they are now, IIPR stock could continue to deliver game-changing returns.
Here’s where the issue comes in, though. Arguably, IIPR has been taking advantage of a loophole. Right now, because marijuana is illegal on a federal U.S. level, banks don’t want to lend to cannabis companies. It’s a ton of legal risk for not enough reward. Since the industry is starved for capital, players like Innovative Industrial are taking advantage by plowing their own money into the greenhouses and then renting them out at very high prices.
But, if the government legalizes marijuana, it would crush Innovative Industrial’s returns. Once banks feel free to lend to marijuana companies, profits in the space will come down markedly.
Thus, in a strange way, you could use IIPR stock to hedge other cannabis positions. As long as the federal government doesn’t legalize marijuana — or at minimum pass an exception to allow banks to lend to pot companies — IIPR stock will perform strongly. Meanwhile, presumably, other marijuana shares would underperform if legalization is delayed longer than people expect.
As a standalone investment, however, I’m cautious on IIPR stock here. I’m just not sure how well the business model will fair once marijuana is totally legalized. At that point, the need for a specialty business like this will decline sharply. I have a ton of respect for IIPR’s management team; they found a hole in the market and made the absolute most of it. I’m not sure how long that market opportunity will last, however.
Tilray isn’t the worst major marijuana stock out there at the moment. We’ll get to the other one in a minute. Still, investors should be awfully careful with TLRY stock here. Shares fell to as low as $2.43 late last year. However, as part of the massive short squeeze in cannabis stocks, TLRY stock then absolutely exploded. At one point, the stock topped $60 for a cool 2,000% gain.
Now, though, Tilray is rapidly heading in reverse. The stock has dropped more than 50% from the recent highs and is in a strong downtrend. And that makes sense. While the $2.43 stock price was too low, a stock price north of $20 now is almost certainly too high.
You see, Tilray is losing more than $250 million per year in operating its business. That considerably exceeds the company’s annual revenues of around $200 million. Despite having awful economics, shares are now going for 16x sales. That’s a huge figure, more in line with fast-growing tech companies, not a money-incinerating weed business.
Also, notably, the American marijuana companies trade at lower price-to-sales ratios than Tilray, even though those are profitable.
For now, TLRY stock is an easy name to avoid.
Sundial Growers (SNDL)
Frequent readers of mine probably know why SNDL stock is last on this list. Nothing personal, Sundial Growers, but there was no reason for the stock to have surged the way it did last month. You may recall, not too long ago, SNDL stock was trading for less than 25 cents per share as it was unclear if the company had any viable path forward.
Reddit traders, however, were looking through all the available marijuana stocks out there. Given Sundial’s very low share price and high short interest, it was an obvious pick to talk up. Once the social media buzz got going, Sundial started to take off. The stock crossed 50 cents. Not long after, it topped a buck.
As GameStop (NYSE:GME) and other shares exploded, Sundial kept gaining momentum as well. By the time the fun really got going, SNDL shares peaked above $3 each. Not bad for something that was at 25 cents not long ago.
Alas, nothing fundamentally improved with Sundial over this time period to justify the stock price. Normally, share prices are fairly tied to a company’s actual operating prospects. But in this case, like with GameStop, Reddit traders bid up SNDL stock completely irrespective of underlying fundamentals.
As such, shares can easily come almost all the way back down; go up on hot air, and you’re not going to have much support under you when the winds shift. Admittedly, GME stock has taken flight again. Given that, traders may give SNDL another go as well, since the meme stocks are back on the radar. Longer-term, though, Sundial is still in trouble.
To its credit, Sundial was able to raise enough cash to stay solvent for quite a while. That’s the best thing it has going for it. But its operating results have shown both large losses and a consistent lack of good revenue growth. Management has bungled its commercialization efforts and thus has to dig itself out of a deep hole. That’s in stark contrast to several of the other marijuana names on this list that are doing things right at the moment.
In a booming industry like marijuana, there’s no need to make life complicated. Own the clear winners, not the struggling turnaround stories.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.