Should you buy cannabis stocks in 2022? Yes and no.
I’d say that it’s also a “no” when it comes to buying most Canadian cannabis stocks. My view is that the headwinds facing these stocks — especially the inability to enter the U.S. marijuana market — will continue to hamper their performance.
Another U.S. multi-state operator, Ayr Wellness (OTC:AYRW.F) , is even cheaper than Cresco. Ayr’s shares trade below 2.4 times sales. Unlike Canopy Growth, Ayr currently generates positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The company continues to see robust growth.
There are still opportunities with cannabis stocks, though. Canadian cannabis producers such as Canopy Growth (NASDAQ:CGC) and Sundial Growers probably won’t be able to jump into the U.S. marijuana market nearly as quickly as many anticipated. This restriction greatly limits the growth prospects for these Canadian pot stocks, at least over the near term.
Evaluate the opportunities
Many cannabis stocks went to pot last year. Shares of the four biggest Canadian cannabis producers ended 2021 in negative territory. So did the stocks of the four biggest U.S. cannabis operators.
As a result of all of this, cannabis stocks initially soared early last year. Canadian cannabis-producer Sundial Growers emerged as a meme stock and skyrocketed more than 500% by mid-February. But then it all fell apart. Why?
The political dynamics of 2022 don’t give much reason to be overly optimistic about near-term changes to federal cannabis laws. COVID-19 cases are hitting record highs in some areas. Unfortunately for investors, many of the challenges that caused cannabis stocks to slump last year are still present.
Understand the challenges
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On the other hand, aggressive investors willing to take on a relatively high level of risk should be able to find bargains among U.S. cannabis stocks. I’d put Ayr and Cresco in that group. Long-term investors can also still win by buying strong ancillary stocks such as Innovative Industrial Properties.
• Innovative Industrial Properties Inc. (IIPR). Cannabis has to grow somewhere, and that’s what Innovative Industrial Properties is betting on. This real estate investment trust (REIT) invests in the industrial side of the cannabis industry: greenhouses and other industrial facilities that support cultivation and distribution. With a dividend yield of 2.33%, it’s attractive from an income perspective and a P/E ratio of 62 says that investors could enjoy dividends in anticipation of growth down the line. For those looking to diversify holdings into real estate, this could be an interesting portfolio addition, especially considering that this REIT has generated a three-year return of over 550%.
• Scotts Miracle-Gro Co. (SMG). Where does a company best known for plant fertilizers come into the cannabis mix? If you can make backyard plants grow, odds are you can make cannabis grow. For investors looking for the proven track record of a large cap stock with a leg in the growing cannabis industry, Scotts could be a fit. It’s acquired multiple cannabis-adjacent and pure cannabis companies and even built a brand new 50,000 square foot facility for R&D to explore how their fertilizer products impact cannabis growth. With a P/E ratio around 15.7 and a 1.7% dividend yield, Scotts stands as a respectable choice for investors exploring cannabis in their portfolios.
• Cronos Group (CRON). As a global brand that makes a wide variety of adult-use cannabis and CBD products, year-over-year sales are up a respectable 58%. Maybe it’s the pandemic. Maybe it’s a carefully cultivated reputation for high-quality cannabinoids. Either way, Cronos displays controlled growth, but investors need to have a sense of adventure, with its 52-week price fluctuation between $4.92 and $15.83 per share.
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The Best REIT with Cannabis Exposure
• AdvisorShares Pure US Cannabis ETF (YOLO). Actively managed ETFs are hard to come by, but here’s one for the cannabis sector. If you’re looking to dip a toe into cannabis, this ETF can help you get all the benefits of an actively managed mutual fund with the real-time liquidity of an ETF. A relatively new fund, it invests in mid-cap industry firms in the U.S., Canada, the U.K. and even Israel. As an active ETF, the expense ratio is high, clocking in at 0.75%.
• GrowGeneration Corp (GRWG). Back in the day, hearing “hydroponics” made you instantly think of someone growing weed in their basement. Today, hydroponics is one of the top cultivation methods for the legal cannabis industry, and GrowGeneration stands as the leading supplier of hydroponic equipment in the U.S. Offering over 50 retail centers throughout the U.S., this young company (founded in 2014) is growing by leaps and bounds. No dividends as of yet, but a P/E ratio above 104 says that growth-oriented investors might find what they’re looking for.
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• ETFMG Alternative Harvest ETF (MJ). Providing a YTD return of 34% as of early September 2021, this ETF that tracks the Alternative Harvest Index is no slouch. With an at-present highly accessible cost-per-share 0f around $16, investors wanting to try the cannabis industry on for size can do so at a low price of entry. Shares come with a steep expense ratio for a passively managed ETF, though: 0.75%.
• Altria Group Inc. (MO). You’ll know this stock best as the maker of Marlboro and one of the behemoths in the tobacco sector (along with its dabblings in the adult beverage industry). Because of that, for ESG investors, Altria’s likely not an option. For those who don’t mind the vice, the company’s making a play for cannabis, holding a substantial stake in Cronos Group, detailed above. While the stock took a substantial hit from its investment in JUUL, share prices have been near their one-year highs. Analysts have noticed and the stock comes complete with several Buy and Strong Buy ratings and a dividend yield that only stocks in this sector can bear: 7.2%.