The pandemic and the ramp-up of state legalization have investors excited about the marijuana industry. The last two years also revealed some exciting mergers and acquisitions in the space, creating some sparkling investment opportunities. But soon, the industry lost all the attention due to a lack of movement toward cannabis reforms in the US However, that doesn’t change the fact that the industry is loaded with some exciting stocks that could bring huge returns over the long term.
Illinois-based Cresco Labs (CRLBF -1.14% † not only reported a solid end to 2021 but also dropped outstanding news that could excite cannabis investors. meanwhile, Planet 13 Holdings’ (PLNH.F -2.43% † and Innovative Industrial Properties’ (IIPR -0.97% † unique business models make them stand out in the marijuana space. Let’s take a look at why these three pot stocks are the best buys in April.
1. Cresco Labs
This Florida-based cannabis operator once again proved with its exceptional fourth-quarter results that it is heading toward becoming a cannabis powerhouse. In its recent Q4 results, the company reported a 34% year-over-year (YOY) increase in revenue to $218 million. Full-year revenue grew a stellar 73% to $822 million. Full-year adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) grew 219% YOY to $194 million.
At the end of the year, Cresco Labs had 46 stores — quite an improvement from 20 stores at the end of 2020. It ended the year with $224 million of cash and cash equivalents, which it can use for further expansion. Three months into the year, Cresco has already opened four more stores, its most recent its 16th store in Florida. Florida does not allow recreational cannabis yet. But having a strong presence in the state will work in Cresco’s favor when the state legalizes it.
Cresco also made an exciting announcement soon after its earnings. The company is planning to acquire Columbia Care† creating a cannabis powerhouse. The deal is expected to close in Q4 2022, subject to approvals. Columbia was already a strong cannabis player. I believe the acquisition will make Cresco a top contender in the cannabis space.
2. Planet 13 Holdings
This cannabis company might be a smaller one by market cap but is playing big. Its marketing strategy is very different from other cannabis multi-state operators (MSOs). Planet 13, a mere $500 million market cap company, has attracted a lot of attention in the US because of its “SuperStore” strategy. Unlike the other MSOs, Planet 13 operates massive dispensaries that give customers a unique retail experience. Its Las Vegas store is the world’s largest cannabis space. The company sells a wide array of branded products, including edibles, vapes, and cannabis extracts.
With stores only in Nevada and California, it is not a high-revenue-generating company yet. But it is slowly spreading its roots to other states. Its smart strategy of creating massive stores in two key cannabis markets, though, has worked in its favor.
Nevada is a tourist market, while California is the largest cannabis market. This strategy brought in $119.5 million in revenue in its full-year 2021, YOY growth of 70%. Full-year positive adjusted EBITDA came in at $17 million, an impressive increase from $7 million in 2020. The company also plans to open another SuperStore in Chicago, where they won a dispensary license.
3. Innovative Industrial Properties
Despite not being a pure-play cannabis company, Innovative is enjoying all the benefits of the cannabis boom. As cannabis is federally illegal, domestic companies find it hard to procure capital to set up large production facilities. Innovative is a real estate investment trust (REIT) that acquires these properties and then leases them to the cannabis companies in a sale-leaseback system. In return, it earns rental income, its only source of revenue. This unique business model has helped Innovative become a strong REIT cannabis company.
For the full year of 2021, the company generated $204 million in revenue and $117 million in net profits, a YOY surge of 75% each. innovative acquired 37 new properties in 2021, bringing its total footprint to 103 properties (100% of its properties are leased out).
The good news is Innovative’s weighted-average lease term is 16.7 years, implying that the company will keep generating rental income for many more years. Innovative is also a dividend stock yielding 3.3%, higher than the S&P 500‘s average of 1.3%.
REITs are required to pay 90% of their net earnings back to shareholders. Thanks to Innovative’s rising adjusted funds from operations (AFFO), it can easily keep paying dividends. (AFFO measures earnings left to be paid as dividends, similar to net income for a non-REIT.) In Innovative’s Q4AFFO surged to $48.5 million versus $32 million in the year-agoh period.
Wall Street sees huge potential in these cannabis stocks. Analysts expect Cresco Labs, Planet 13, and Innovative’s stock to grow 125%, 223%, and 25% in the next 12 months. Growth stocks need time to show their full potential. I believe these stocks could bring huge returns over the long haul. The stocks are cheaply valued now, making it the right time to buy and hold.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.