Marijuana stocks could well be one of the hottest investment trends in 2021. Pot stocks also drew the attention of investors in 2018 and 2019, before cooling off in 2020. The recent marijuana industry growth and new laws and regulation of cannabis set both risks and growth prospects for this type of investment.
If there is a shift in public sentiment, and the legalization of cannabis for recreational purposes becomes a reality in the U.S. over the next few years, these four marijuana stocks could deliver both growth and gains in this booming industry.
The major risk involved with investing in the marijuana industry — and one certainly not to ignore — is that it is still technically illegal on the Federal level in the U.S. An IMARC research on “North America Legal Cannabis Market: Industry Trends, Share, Size, Growth, Opportunity and Forecast 2021-2026” states “The North America legal cannabis market reached a value of US$ 16 Billion in 2020. … In the United States, marijuana has been legalized in 30 states for medicinal use and in 9 states for both therapeutic as well as recreational purposes. In Canada, medicinal usage of the drug has been legalized since 2001; however, its recreational use has been authorized through a bill passed in June 2018.”
If marijuana becomes legal for recreational use soon, it could well be a factor increasing demand, boosting sales of companies related to cannabis products.
A report by Grand View Research about the Legal Marijuana Market Size states that “The global legal marijuana market size is expected to reach USD 73.6 billion by 2027” and “ It is anticipated to expand at a CAGR of 18.1% during the forecast period. The increasing legalization of cannabis for medical as well as adult-use is expected to promote growth.”
If these growth expectations and legalization hopes come true, then the following marijuana stocks may be poised for capital gains.
Four marijuana stocks to keep under your radar are:
- Aphria (NASDAQ:APHA)
- Trulieve (OTCMKTS:TCNNF)
- Cronos (NASDAQ:CRON)
- Innovative Industrial Properties (NYSE:IIPR)
Marijuana Stocks: Aphria (APHA)
Aphria has announced a merger with Tilray (NASDAQ:TLRY) later in 2021, in an all-stock deal that will create the largest Canadian cannabis company. But it could also form one of the biggest worldwide players in the cannabis industry.
This deal is probably the first of many merger & acquisition deals to follow for marijuana stocks. The industry is still nascent, and reducing costs can benefit companies that produce, distribute and sell medical cannabis in Canada and internationally. And then if marijuana becomes legal for recreational purposes, sales not just for Aphria, but for most of the marijuana stocks most probably will boom.
Aphria has seen an increase in sales in 2020 of 128% compared to 2019. Gross profit has increased, but net income, the bottom line, is still negative.
This may change soon due to the merger.
The cannabis industry has many companies that struggle to become profitable. Trulieve is among profitable medical cannabis companies, operating 75 dispensaries in the United States.
It has a variety of products, ranging from smokable flower and flower pods for vaporizing to capsules, tinctures, and even vape cartridges. With a market capitalization of $5.611 billion and headquarters in Florida, this company is profitable as of 2018.
The price-earnings ratio over the trailing 12 months of 82 does not make it a bargain stock. But P/E ratio itself can be misleading. Revenue grew to $253 million in 2019, up 147% from $103 million in 2018. What is most important is that Trulieve is profitable also from its main operations, as operating income grew to $285 million in 2019, up 280% from $75 million in 2018.
It seems that profitability is gaining momentum, and if this trend continues, a higher stock price may be a very probable scenario.
The stock has a P/E Ratio (TTM) of 77, which makes it slightly more attractive compared to Trulieve. Cronos Group has its headquarters in Toronto, Canada, and is a manufacturer and distributor of hemp-derived supplements and cosmetic products. It has several business and marketing channels, such as e-commerce, retail, and even hospitality partner channels.
For Cronos, Federal state legalization of cannabis could do wonders. That is because the company also cultivates and manufactures cannabis and cannabis-derived products both for the medical and recreation markets.
In late 2018, Altria (NYSE:MO) invested $1.8 billion into Cronos Group, and this investment is important — it could mean future cash injection or even a complete buyout. Both of these factors should be positive for Cronos.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties has indeed a very interesting business model. It is a real estate investment trust (REIT) that uses a sale and leaseback agreement, meaning it buys properties from medical cannabis operators and then leases those properties back to the operators. It is a great way to provide a solution to medical cannabis companies looking to raise cash.
Again, its P/E Ratio (TTM) of 68 does not make it a bargain stock at first. But it has an attractive forward dividend yield of 2.3%.
There are several fundamental things to like about IIPR stock. For the past two years, there has been a substantial increase in revenue, operating income, and free cash flows. This is a marijuana stock that could provide both income from dividends and possible stock price appreciation, making it suitable for more conservative investors.
There are expectations that the cannabis industry may see a significant increase in revenues over the next couple of years, as the probability of Federal legalization is high. But do remember that risks exist and are high. Doing further due diligence is always recommended before deciding whether to buy.