7 Best Marijuana Stocks to Buy in 2024 | Investing

On Feb. 28, long-serving Senate leader and longtime marijuana opponent Mitch McConnell said he’ll step down from his position and help select a replacement in November.

In the legal marijuana industry, he is best known for holding up passage of a 2022 bill that would have allowed the cannabis sector to access the banking system without facing money-laundering charges or heaps of paperwork.

“The news that McConnell is stepping down from his leadership position is an incremental positive for the cannabis industry,” says Matt Karnes, founder of cannabis industry financial analysis and research firm GreenWave Advisors. “As he winds down his leadership position, I believe he is less likely to stand in the way of potential legislation that could move the industry forward.”

McConnell’s announcement comes at a time when other federal reform steps are in the works, including the U.S. Drug Enforcement Administration considering rescheduling the drug, a move that could open up lucrative tax deductions and credits enjoyed by federally legal businesses. A bill that would remove marijuana from the Controlled Substances Act altogether is also in the works. And legislators continue to work on banking reform.

“We anticipate a shift in perspective with his departure and remain hopeful for a more receptive approach to cannabis reform from the incoming Senate Republican leader,” says Mike Bologna, CEO of Green Lion Partners, a cannabis strategy firm.

Morgan Paxhia, managing director with cannabis hedge fund Poseidon Investment Management, is cautious, as McConnell’s opposition was just one issue facing the industry.

“The phrase that comes to mind is ‘the devil you know,'” Paxhia says. “What if the person replacing him is even worse?”

It’s just one more unknown hanging over an industry that has been battered by disappointment and plagued by bad management decisions, competition from the illegal market and oversupply. That leaves some cannabis stocks beaten down, and they may be bargains for investors who are willing to hold them for a long time. But keep in mind that there are also significant risks in this space.

For investors trying to gain exposure to weed through cannabis stocks, large marijuana companies that operate in more than one U.S. state where the drug is legal – known as multistate operators, or MSOs – offer advantages for those willing to buy shares and hold them for what will likely be a considerable time.

Larger companies have an advantage over smaller ones when it comes to surviving a tough regulatory environment.

Trulieve is an MSO with positions in Florida, Arizona and Pennsylvania and has a history of being able to fund its tax obligations through cash flow instead of raising capital.

Trulieve is a top pick for Michael Sassano, CEO of cannabis-based therapeutics company Somai Pharmaceuticals. That’s “because of strong management and effective penetration in more limited license markets,” he says. “They avoided the ultra-competitive markets like others trying to have every state.”

Trulieve’s fourth-quarter performance numbers released Feb. 29 showed its revenue increased 4% sequentially, with 95% of revenue from retail sales. For 2023, the company reported record cash flow from operations of $202 million.

For some marijuana companies, their large tax bills have exceeded the amount of cash they generate from operations, leaving them to have to raise capital to pay taxes. But others, such as this multistate operator, have been able to earn enough to cover their taxes with operational cash flow, even without federal reform.

Paxhia says Green Thumb Industries is “a great company” based on its capital expenditures, revenue-to-debt ratio, ability to retire debt and buy back stock, and good management. “We were early investors in the company,” Paxhia says.
 

This company has vertically integrated operations in Pennsylvania, New Jersey, Maryland, Michigan and California. That means it sells marijuana products that it cultivates, processes and manufactures itself, rather than buying weed wholesale to mark up and sell in dispensaries. The company also has retail operations in Canada.

Paxhia says the company has been working on its balance sheet and has good growth prospects.

This month, TerrAscend applauded Pennsylvania’s governor for endorsing an adult-use cannabis program in the state. The governor is proposing legalizing adult use starting July 1 for possession and consumption and full sales starting early next year.

This vertically integrated MSO is active in 13 states, grows more than 160 strains of marijuana at 14 cultivation and production facilities with more than 1 million square feet of cultivation capacity, and sells its products in more than 130 company-owned dispensaries. Its brands are sold in hundreds of other retail locations.

The vertically integrated model gives the company more control over how its products are grown and made, and that means it doesn’t have to pay a premium to buy marijuana from others. It also creates operational efficiencies.

“Verano Holdings has aggressive management and could possibly expand globally,” Sassano says.

Innovative Industrial Properties Inc. (IIPR)

This company leases specialized real estate to state-licensed cannabis operators. It has more than 100 properties in 19 states.

On Feb. 26, the company reported 2023 sales of about $309.5 million, up 12% over 2022. Its per-share net income attributable to common stockholders rose 5%.

At the end of last year, the company’s debt was 12% of total gross assets of about $2.6 billion. It had about $177.2 million in cash, equivalents and short-term investments and availability under a revolving credit facility.

Scotts Miracle-Gro Co. (SMG)

This gardening and lawn care company’s Hawthorne Gardening Co. subsidiary targets marijuana growers with nutrients, lighting and other materials used in the indoor growing and hydroponic segment.

The marijuana industry downturn hasn’t been kind to the Hawthorne subsidiary, with the company reporting in February that sales dropped 39% year over year to $80.1 million in the quarter ended Dec. 30.

That was partly because of a continued slump in the indoor and hydroponic market, the company said. But it also added that restructuring actions, including focusing on fewer but more profitable brands, was a factor.

As sales have been slumping, Scotts Miracle-Gro has been trying to turn the Hawthorne business around by reducing its operating footprint, overhead expenses and individual product offerings.

Some in the industry recognize the company’s efforts to position itself for growth, such as Leslie Bocskor, CEO of Indoor Harvest, a hemp products platform. “Scotts Miracle-Gro is in a great position,” Bocskor says.

One of the ways at least two cannabis companies have been weathering the downturn in the marijuana industry is by diversifying into alcohol sales.

One of them is SNDL, which earned more than twice the revenue from its retail liquor business in the third quarter of 2023 as it did from retail cannabis.

The company also reported that it tripled its net cash from operating activities over the prior-year period, along with a 3.1% revenue increase. As SNDL has focused on streamlining operations and expanding its cannabis retail sales, quarterly revenues in that segment alone increased by 14% year over year.