7 Ways to Invest in the Future of Cannabis

While the path to federal cannabis legalization is moving slowly, public and political sentiment is increasingly supportive. Several leading advisors and contributors to MoneyShow.com believe the marijuana market's doldrums are creating long-term investment opportunities. Here are four favorite cannabis purveyors, two marijuana ETFs and one ancillary tobacco segment firm that makes Zig-Zag rolling papers as well as vapor and e-liquid products. Ryan Irvine, Internet Wealth Builder Headquartered in Quincy, Florida, Trulieve is primarily a vertically integrated seed-to-sale company and is the first and largest fully licensed medical cannabis company in the State of Florida. Trulieve cultivates and produces all its products in-house and distributes them to Trulieve-branded stores (dispensaries) throughout the state, as well as directly to patients via home delivery. Trulieve also holds licenses to operate in California, Massachusetts, Pennsylvania, Connecticut, and West Virginia. Second-quarter revenue jumped 78% to $215.1 million, from $120.8 million in the three months ended June 30, 2020. Revenue for the first six months of the current fiscal year was $408.9 million, an increase of $192.1 million from $216.8 million from 2020. The increase in revenue is the result of organic growth in retail sales due to an increase in products available for purchase and overall patient count. Over the 12 months from June 30, 2020 to June 30, 2021, Trulieve opened or acquired 40 dispensaries. These also contributed to the increased retail sales year-over-year. Second-quarter net income jumped 116% to $40.9 million from $18.9 million last year. Net income for the six months to June 30 was $71 million, an increase of $28.4 million or 67% from $42.5 million the year before. On Oct. 1, Trulieve announced the closing of the acquisition of Harvest Health & Recreation. The transaction represents the largest in U.S. cannabis history with the swift five-month close coming a full quarter earlier than anticipated. The closing solidifies Trulieve's positioning as the largest cannabis company globally by operational scale and profitability. With the company retaining all of Harvest's assets, the combined operation boasts 149 retail locations and 3.1 million sq. ft. of cultivation. This compares to its nearest competitor at 109 retail outlets and two million sq. ft. of cultivation. If the company can meet management's fiscal 2021 adjusted EBITDA guidance of US$461 million, and trade with a justified EV/ EBITDA multiple of just 16.5 times, we estimate fair value for the stock over the mid-term to be approximately C$55 per share. Peer multi-state operators trade at significantly higher EV/EBITDA multiples. For investors with above-average risk tolerance, the growth should continue to be strong, looking 3-5 years, forward and Trulieve should continue to benefit long-term. Hilary Kramer, Trading Desk It's been a terrible year for Big Cannabis, casting a shadow over the entire industry. My proprietary cannabis indexes down 27% year-to-date. Not fun at all. But the two cannabis stocks that have defied the trend each have something unique in their favor. Organigram excels on quality and is working on cannabis-derived pharmaceutical products. Those products will be patent protected, defying the race to the bottom. And then there's Tilray , now the biggest supplier in many market segments and arguably the highest-quality name among the major cultivators. They've got scale on their side and an inside track on the medicinal market. Clearly, it's won them fans on Wall Street. Until we see real action elsewhere in the group, these are the only two names you really need to look at. Everything else is embroidery around the edges, at least for now. Jason Williams, The Wealth Advisory Innovative Industrial Properties is a real estate investment trust (REIT) that's focused on the acquisition, ownership, and management of specialized industrial properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. The firm has beat or met expectations in three of the past four quarters. The company also boosted its dividend by 6% -- to $1.50 per share per quarter. It's now hiked that payout 500% since 2017 when the company paid $1 per year.. Management announced the purchase of three more 100%-leased properties. There's one in Missouri, one in New York, and one in California. That makes 76 properties fully leased. When we first invested there were fewer than 10. That's some serious growth. And we can expect the dividend to grow some more (even though we're currently getting more each quarter than we were getting each year when we started). Those new properties are generating revenue and that's going to translate into another dividend hike. So keep your eyes out for that. We're still adding shares under the new buy limit of $250. Our 12-month price target is $325. Sean Brodrick, Wealth Wave The fundamentals for cannabis stocks are looking better than ever. The global cannabis market is predicted to grow to $66 billion by 2025 with a 24% compound annual growth rate, and retailers are reporting excellent earnings. The cannabis industry is being overlooked due to slower-than-expected legalization efforts. Demand for cannabis has surged over the last several years. The pandemic pushed sales into overdrive after marijuana was labeled an essential good. Last year, total sales in the U.S. soared 45% despite pandemic-related challenges! This year, sales are forecast to increase another 23% to $21.7 billion. U.S. multi-state operators (MSOs) have been reporting excellent sales results, with some boasting year-over-year revenue growth of over 200%! The top ten largest MSOs all logged double-digit quarterly sequential growth. The initiative to federally legalize marijuana is supported by the people, corporations and the Democratic majority in government. It's just a matter of time before the industry cuts through the red tape. When cannabis is legalized federally, we'll see institutions enter the game. There will be significant positive pressure on cannabis stocks because there will be substantial demand for industry exposure. That should send prices flying along with the other important developments post-legalization, including access to banking and insurance services. With these factors in mind, here are my two favorite ETFs to capitalize on the cannabis industry's rebound. AdvisorShares Alternative Harvest ETF is a fund that seeks exposure to cannabis companies worldwide, and it tracks the Prime Alternative Harvest Index. MJ is the largest and most liquid cannabis exchange-traded fund, and it targets companies that would benefit from both its medicinal properties and expansion of recreational use. This ETF's top three positions by weighting are Tilray , Canopy Growth and Aurora Cannabis . MJ has over $1.1 billion in assets under management (AUM), and its expense ratio is 0.75%. The fund's average trading volume is 814,000 shares. I've stayed away from this ETF in the past because of its heavy weighting towards Canadian cannabis stocks. But this is also the fund that will be the first to get institutional money because its holdings are listed on major exchanges. AdvisorShares Pure US Cannabis ETF focuses solely on U.S.-based cannabis companies, and it offers diversified exposure for both the biggest players and smaller companies with breakout potential. MSOs (multi-state-operators) are among the biggest beneficiaries of potential legalization because of their expansive infrastructure and vertical integration. MSOS's top three holdings are Green Thumb Industries , Curaleaf Holdings and Trulieve Cannabis . MSOS actively manages over $740 million in assets, and its expense ratio is 0.74%. It trades with a liquid average volume of 545,000 shares. Oftentimes, the best opportunities are found in overlooked industries. Cannabis stocks were thrown in the gutter, but that won't last forever. Indeed, they are value stocks -- some of the best values we've seen in a decade or so. Frank Curzio, Curzio's Research Advisory Tobacco and vaping product company Turning Point Brands reported Q3 earnings on Oct. 26. Earnings and sales were solid, but management lowered estimates on its NewGen Products segment, and the stock sold off. We'll use the weakness to add to our position. NewGen Products is TPB's highest growth segment, which includes vapor and e-liquid products. The estimates were based on uncertainty over the new Premarket Tobacco Application (PMTA) process. This application must be filed and approved by the FDA for each vapor product marketed and sold to consumers. It's an expensive process that costs manufacturers millions of dollars. Since Turning Point is the industry leader, with plenty of cash on its balance sheet, this new regulatory process gave the company a huge advantage over smaller competitors. Most had to drop out of the market. The FDA is now continuing to review TPB's applications for its vapor and e-liquid products. Meanwhile, distributors have no idea which vapor products will be approved. This leads to delayed orders, which then causes inventory issues for TPB and the entire industry. Given these headwinds, TPB thought it would be smart to lower its revenue projections for its NewGen Products division. Digging more into the numbers, Turning Point reported strong results from its other two divisions: Zig-Zag (rolling papers) and Stokers (chewing tobacco). Zig-Zag's volume grew 17% year-over-year (YoY) while Stokers continued to increase its market share, which is now close to 6% of the market. This is a big deal, considering these two divisions account for 95% of total operating income. After falling below $40 a share, TPB now has a market cap of just over $700 million. Based on my estimates, its Zig-Zag business is worth more than $800 million alone. TPB is still the leader in its industry. It has over $150 million in liquidity -- enough to put all of its vapor products through the PMTA process, build out its Zig-Zag and Stoker divisions, continue expanding its distribution platform, and invest in new technologies and products. It also increased its shareholder buybacks from $19 million to $50 million. I'm sure management will be actively buying its stock back at these levels; I suggest you do the same and build a full position.

7 Ways to Invest in the Future of Cannabis

Leading advisors pick four favorite cannabis purveyors, two marijuana ETFs and one ancillary tobacco segment firm.

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