Diversification is always key, but reliability is especially important in a legally uncertain field like cannabis
Cannabis stocks are well past their peak. But that doesn't mean the industry is dead or dying. In fact, quite the opposite. It is clear that full-scale marijuana legalization is ultimately inevitable. Lawmakers and the Legislature are already pushing for that scenario following ongoing scheduling reforms. But if you're looking to cannabis legalization to revitalize your cannabis-based portfolio, think again.
Smaller companies, especially those that compete for equity in the public markets and are responsible for creating shareholder value, are at a disadvantage. First, product profit margins are extremely tight. Rising high-tech costs, marketing, packaging, and endless taxation make it difficult to squeeze profits out of products. Second, cannabis companies face intense competition from both ends of the spectrum. If legalization were to become a reality, big players in beer, tobacco (and even pharmaceuticals) would be able to squeeze out smaller competitors. At the same time (cannabis is a weed, after all), at-home enthusiasts are more likely to grow their own rather than paying high prices at their local dispensary.
But cannabis stocks aren't a lose-lose proposition. Rather than betting your farm on a small number of producers, distributors, and dispensaries, look to cannabis stocks that cover a broader range of direct and peripheral sectors. These seven stocks offer diverse access to the big picture of cannabis while still having the strength to hold up until full legalization.
Tilray Brand (TLRY)
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Tilray Brands (NASDAQ:TLRY) is a cannabis company first and foremost, which seems to violate my diversification theory. But in reality, Tilray affirms my point. The cannabis company has increasingly diversified its operating strategy, and the results are now showing, with even more upside potential on the horizon. Since starting to spread its wings, Tilray's revenue has increased 15% year-over-year, moving it one step closer to profitability. But Tilray's rise is just beginning.
In August, Tilray acquired eight brands from Anheuser-Busch (NYSE:BUD), solidifying its presence in the craft beer brewing space. This strategy has propelled the cannabis company to the position of the fifth-largest craft beer maker in the United States. Craft beer is a popular product, with product sales soaring eight times faster than the industry average in 2021.
While this expansion opens up new revenue avenues, Tilray's real advantage lies in its logistical wins. By acquiring these brands, Tilray will also unlock access to an established distribution network and strong marketing capabilities, all of which will complement the company's core cannabis business. Tilray's CEO emphasized the possibility, saying, “One day if it's legal[in the U.S.]we'll be injecting these drinks with THC and CBD, but once it's legal, we'll have distribution and branding.'' Probably.'' happen. ”
Ultimately, Tilray serves as the prototype for tomorrow's cannabis companies. We are small and agile enough to adapt to changing markets and regulatory frameworks, yet have sufficient scale and the desire to expand our horizons (along with our revenue streams).
Constellation Brand (STZ)
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Like Tilray, Constellation Brands ( NYSE:STZ ) is also involved in the beer industry. However, unlike Tilray, this is STZ's main focus. Constellation Brands is a Fortune 500 company. STZ generates nearly $10 billion in global product sales and has a significant customer base in the United States. Despite its beer-based operating model, Constellation Brands also owns a significant stake in cannabis company Canopy Growth (NASDAQ:CGC). This partnership aligns with a similar strategic vision as Tilray.
Constellation Brands is currently taking a hands-off approach to its $4 billion investment. Still, it's clear that the company's management is likely waiting for the legal situation to change. Constellation owns a 35% stake in the cannabis company and has established a significant presence in the cannabis space. In response, CGC is diligently building its financial position in preparation for potential reclassification and legalization developments.
Constellation Brands may not be following the beaten path, but legalization efforts require a long timeline. Meanwhile, investors seeking a more conservative entry into the sector can take advantage of Constellation's established market position and solid stock price performance.
Valley National Bancorp (VLY)
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One of the most difficult operational hurdles cannabis companies face is financial management. Due to the continued federal illegality of cannabis, traditional and established banking institutions tend to avoid providing financial services to these companies. But Valley National Bancorp (NASDAQ:VLY) is bucking this trend and fully embracing cannabis banking.
Valley National has dedicated an entire branch of banking services to serving the needs of cannabis-related businesses, aptly named “Cannabis Bank.” This dedicated branch is designed to support a variety of stakeholders within the cannabis industry, including dispensaries, cultivators, and even cannabis-related businesses that typically operate primarily in cash. Relying on cash transactions can be risky, inviting the possibility of theft and unwanted scrutiny from the IRS. By providing a legal financial platform for cannabis companies to operate within the law, Valley National provides an invaluable service.
As the cannabis industry continues to expand and mature, Valley National will continue to be a prominent player in the banking sector due to its first mover advantage. Even as traditional banking institutions gradually enter the space, major cannabis companies are likely to remain loyal to and dependent on Valley National's professional cannabis banking services.
Scotts Miracle Glo (SMG)
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Scotts Miracle-Gro (NYSE:SMG) may not be directly involved in cannabis sales or distribution, but the future of cannabis could have a big impact on this agricultural company. SMG owns Hawthorne Gardening. Hawthorne offers a variety of legal hydroponic equipment and tools for growing cannabis, primarily for large-scale growers. Rescheduling cannabis will have a positive impact on the cannabis industry as a whole. However, SMG is in a strategic position to benefit from industry growth, regardless of which particular company emerges as a leader.
At the same time, legalization could lead to a surge in home cannabis cultivation as it reduces legal barriers for the general public. Given the popularity of homebrewing in recent years, we can see how SMG can tap into the potential of DIY consumers, as they offer a one-stop shop for all the equipment needed to promote the hobby. Masu. Additionally, Scotts has a wide presence in hardware stores and garden centers across the country, allowing us to get our products on shelves quickly. This accessibility can position Scotts as the preferred equipment provider for both businesses and individuals interested in expanding or building a growing business.
Chicago Atlantic Real Estate Finance (REFI)
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Chicago Atlantic Real Estate Finance (NASDAQ:REFI) is an ideal choice to diversify your portfolio beyond cannabis exposure. REFI is a mortgage REIT. REIT performance has been poor overall this year. The entire REIT sector is down more than 5% since January. But much of the downward momentum from rising interest rates is coming from the equity REIT sector. By comparison, mortgage REITs are actually up 5.3%. Based on this, REFI is a solid stock pick to diversify your portfolio, offering an impressive forward dividend yield of 13.40%.
But REFI also provides unique exposure to the cannabis industry. Similar to VLY, REFI provides private credit opportunities to licensed cannabis operators, strengthening their position in the financial sector. Many commercial cannabis businesses are struggling with traditional financing and mortgage opportunities due to concerns about federal legalization. REFI cuts through the red tape. REFI provides attractive loans to fast-growing industries without the hassle of dealing with traditional lenders. Of course, there is a possibility that traditional financial companies will enter the market in the future. Still, private financial institutions like REFI offer greater flexibility (and preferential terms), which sets them apart. After all, REFI is a top pick in today's high interest rate environment. Private lending is growing in popularity and REFI provides ideal exposure to the cannabis industry.
WM Technology (MAPS)
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WM Technology (NASDAQ:MAPS) stock is facing a tough situation. But this cannabis tech stock offers significant upside potential as one of the few (if not the only) software providers connecting consumers to cannabis dispensaries. The company owns and operates Weed Maps, an app-based option for consumers to source and purchase cannabis from dispensaries in legal areas. While this value proposition alone is good enough, it remains hampered by limited legalization nationwide.
Still, WM Technology is effectively a penny stock, meaning it's well priced for investors looking to bet on big gains over the long term. Despite the company's recent weak performance, it recently beat analysts' expectations by a wide margin. This above-profit performance strengthens the popularity of cannabis as a consumer product despite economic hardship, serving a stay-at-home demographic accustomed to ordering food, groceries and more online. . Experts predict that the broader cannabis market will grow nearly 25% annually through 2030, and software services like Weed Maps are a key part of that growth trajectory.
Village Farms International (VFF)
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Village Farms International (NASDAQ:VFF) is another penny stock, but one that offers diversified exposure to the cannabis sector. VFF is an agricultural greenhouse company that grows tomatoes, cucumbers, and more in state-of-the-art facilities through its main subsidiaries. The focus on clean energy and sustainable agriculture alone makes VFF an attractive stock that captures the global green enthusiasm and focus.
However, VFF also owns and operates Pure Sunfarms, which manufactures and sells numerous cannabis-based products, including edibles. Diversifying its revenue streams and innovative approach to farming make VFF one of the top cannabis stocks today. Although the company's stock price has been depressed, recent earnings have outpaced improving outlooks. Over the last year, VFF posted a loss of US$0.07 per share, while its latest report shows a significant improvement in profitability (with a loss of just US$0.01 per share). Sales also increased by nearly 10% higher than expected. These financial data reassure investors that VFF can adapt to changing economic conditions and demonstrate its growing popularity across market segments.
On the date of publication, Jeremy Flint had no positions in the securities mentioned. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com Publishing Guidelines.
Jeremy Flint, an MBA graduate and accomplished finance writer, specializes in content strategy for wealth managers and investment funds. Passionate about simplifying complex market concepts, he focuses on fixed income investing, alternative investments, economic analysis, and the oil, gas, and utilities sectors. Jeremy's work can also be found at www.jeremyflint.work.
