The ETFMG Alternative Harvest ETF (NYSEARCA:MJ) finished June down 19.6%, more than double the decline of the S&P 500, which lost 8.4% on the month. In turn, the best marijuana stocks to buy got a lot cheaper in June.
Overall, it’s been a tough year for the cannabis industry. MJ stock has lost 44% year-to-date (or YTD). and the AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS) has done even worse, down just over 50% YTD.
Benzinga recently produced a chart that shows large cannabis multi-state operators (MSOs) have an enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) of 5 times, cheaper than 11 other major industries, including healthcare products, hotel/gaming, and food processing.
Not only are large cannabis MSOs cheap on an EV/EBITDA basis, but the expected growth in revenue between 2021 and 2023 is higher than all but one other industry mentioned in Benzinga’s chart.
So, between legalization initiatives in various states and an ongoing consolidation movement, an excellent place to start for the best marijuana stocks to buy is the large MSOs.
|IIPR||Innovative Industrial Properties||$93.46|
Best Marijuana Stocks: Tilray Brands (TLRY)
The strategic alliance between Tilray Brands (NASDAQ:TLRY) and Hexo (NASDAQ:HEXO) is expected to be completed in July. The two companies working together are expected to deliver $80 million in “shared cost-saving synergies” over 24 months.
As part of the strategic alliance, Tilray agreed to buy Hexo’s secured convertible notes outstanding along with any outstanding interest due. The amount will be somewhere between $160 million and $170 million. And the reward for helping Hexo out of a financial jam is the right to convert the notes to equity at 40 cents Canadian.
That said, Piper Sandler analyst Michael Lavery cut his price target for Tilray in half in mid-June, suggesting a combination of lower market share in the Canadian adult-use cannabis market and lower sales from its Sweetwater craft beer acquisition has forced him to cut earnings estimates for the next two years.
Overall, though, I continue to believe that CEO Irwin Simon will get the company to a better place. Investing in TLRY stock requires patience and reasonable expectations, as the cannabis industry remains in flux.
Altria Group (MO)
It wasn’t a fun month for the shareholders of Altria Group (NYSE:MO) shareholders. MO stock lost more than 22% after the Food and Drug Administration (FDA) banned Juul from selling its electronic cigarettes in the U.S. in the U.S. Altria paid $12.8 billion for its 35% stake in 2018. Now, it’s virtually worthless.
“The 35% investment in Juul is Altria’s way of covering all of its bases as it prepares for the day when no Americans smoke cigarettes,” I wrote in December 2018.
“Like a big trade by a professional sports team, Juul might have been the expensive star player, but Cronos could be the steal of the deal for Altria shareholders.”
Altria paid $1.8 billion for 45% of Cronos. The option to buy another 10% and control the company cost it an additional $1.1 billion. The e-cig company was valued at $38 billion when it made its Juul investment. Now, not so much.
At least with Cronos, it’s still got a shot.
Altria’s trailing 12-month (TTM) free cash flow (FCF) is $8.25 billion. That gives it an FCF yield of 10.9%. I consider anything over 8% to be in value territory. Plus, don’t forget it’s got a dividend yield of 8.62%.
Thus, investing in MO stock is a safer way to play cannabis.
Best Marijuana Stocks: Constellation Brands (STZ)
Constellation Brands (NYSE:STZ) reported its first quarter of 2023 results on June 30, and the figures were pretty good. Net sales were 17% higher over Q1 2022, while its operating income was 10% higher year-over-year (or YOY).
As a result, it expects earnings per share (or EPS) of at least $11.20 on a comparable basis in 2023, with free cash flow between $1.3 billion and $1.4 billion.
Collectively, two of its beer brands are selling very well. Modelo Especial experienced 15% depletion growth in the first quarter, while its Pacifico brand had 21% depletion growth.
Of course, its investment in Canopy Growth (NASDAQ:CGC) remains a drag on its financials. In Q1 2023, it had a 24-cent loss on its equity investment in the Canadian cannabis company.
On June 29, Constellation exchanged 100 million Canadian Dollars worth of 4.25% senior notes due in 2023 for between 21.9 million and 30.7 million shares of Canopy stock. Assuming it exercises all of its warrants, Constellation controls between 50.3% and 50.7% of Canopy Growth.
Like Altria, Canopy Growth has little effect on the rest of Constellation’s business. Thus, buying STZ stock gives you a cannabis play without much less aggravation.
Sundial Growers (SNDL)
When the Calgary-based cannabis producer, retailer and investor announced its Q4 earnings at the end of April, Sundial Growers (NASDAQ:SNDL) said that if the market conditions didn’t improve, it would seek shareholder approval to do a reverse split of its shares at its 2022 Annual General Meeting on July 21.
Market conditions haven’t improved. As I said in the introduction, the index had the worst first half since 1970. Trading at 33 cents per share as I write this, get ready for a vote. There’s almost no chance shareholders will say no to a reverse split.
Nonetheless, I like Sundial because of its diversified business model. The last time I wrote about Sundial was in April, a few days before it announced its Q4 2021 earnings.
ATB Capital Markets analyst Frederico Gomes feels the same way. In fact, he thinks it’s the best bet in the Canadian cannabis space.
“We view SNDL as a consolidator in the early innings, and we believe the stock offers the most compelling risk-reward alternative in the sector as both a defensive (strong balance sheet and diversification) and contrarian (net purchaser amid market downturns) play,” the Cantech Letter reported Gomes wrote in early June.
I couldn’t agree more.
Best Marijuana Stocks: Trulieve Cannabis (TCNNF)
Florida-based Trulieve Cannabis (OTCMKTS:TCNNF) is the largest holding in MSOS with a 16.91% weighting.
In the first quarter of 2022, the company reported record revenue of $318.3 million, making it the largest revenue generator among U.S. cannabis companies. On an adjusted EBITDA basis, it earned $105.5 million in the quarter, 16% higher than a year earlier. Equally important is the fact it had a gross margin of 56.0% in the quarter, 1,260 basis points higher than a year earlier.
It now has operations in 11 states, with 30% of its 162 retail dispensaries located outside of Florida. As a result of its strong quarter, the company reiterated its 2022 guidance for $1.35 billion in sales and adjusted EBITDA of $475 million at the midpoint of its outlook.
Of the 19 analysts covering its stock, the average rating is “buy,” with a median target price of $46.07. Trading at less than $12, that’s tremendous upside potential.
The risk/reward proposition is tremendous.
Curaleaf Holdings (CURLF)
Curaleaf Holdings (OTCMKTS:CURLF) had the second-most revenue among U.S. cannabis producers in the first quarter at $$313.1 million. They were 20% higher than Q1 2021. In terms of adjusted EBITDA, it earned $72.9 million, 16% higher than a year earlier. The company’s gross margin was 49.5%, 650 basis points less than Trulieve.
Curaleaf finished the first quarter with 128 retail stores, up from 117 at the end of December and 102 in Q1 2021.
I believe in edibles and cannabis-infused drinks rather than smoking marijuana. At the end of May, Curaleaf launched Endless Coast, the company’s version of cannabis-infused seltzers. Available in four flavors, the drinks contain between 2.5 mg and 5.0 mg of THC. The Grapefruit & Botanicals flavor also has 2.5 mg of CBD.
Here in Canada, cannabis-infused drinks seem to have the best product packaging of all the various categories. That will be an advantage as more people gravitate to them. In the U.S., data from Headset suggests cannabis-infused beverages are taking market share from other categories.
Curaleaf believes it can overtake Trulieve in 2022 full-year revenue. Its guidance is for $1.45 billion in sales at the midpoint of its outlook, $100 million higher than its competitor.
Best Marijuana Stocks: Innovative Industrial Properties (IIPR)
Just eight analysts cover Innovative Industrial Properties (NYSE:IIPR), a real estate investment trust that owns specialized industrial warehouses leased by licensed cannabis producers.
The analysts’ average rating is “buy,” with an average target price of $221.29, 94% higher than its current share price.
The REITs most recent acquisition in mid-June saw it acquire 25 acres from Texas Original, a vertically integrated licensed producer. It will ultimately invest $22 million to build an 85,000-square-footndustrial and hybrid greenhouse facility. Texas Original has entered into a long-term lease agreement with the REIT.
The acquisition brings its properties owned to 111 as of June 15. The properties are located in 19 states and represent 8.4 million square feet of rentable space.
In the first quarter, IIPR had revenue of $64.5 million, 50% higher than a year earlier. Its adjusted funds from operations (AFFO) in the quarter was $53.8 million, 40.1% higher than Q1 2021.
If you lean toward income-generating investments, IIPR should be on your watchlist.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.