Slowly but surely, whispers and rumors of widespread cannabis legalization are swirling to the surface. Though cannabis stocks’ last big run, in the late 2010s, far eclipses today’s market and per-share pricing, we’re gradually seeing top cannabis stocks to buy tick upward. The most recent bullish tailwinds are multi-pronged and global, with Germany and Florida alike angling toward more widespread recreational legalization.
We may be finally seeing the cannabis domino effect come into existence as legalization efforts compound and snowball, increasing its national (if not global) pace until we view its prohibition much the same way we reflect on alcohol prohibition in the early 1900s.
Of course, there’s a catch for investors. Though some of the profitability problems will disappear when wider federal legalization happens (mostly due to complex tax considerations), the fact remains that cannabis is a low-margin crop with stiff competition and rigorous regulations driving profits down further. To that end — if you’re looking for the best cannabis stocks to buy — going all-in on a pure-play cannabis stock isn’t the way. Instead, look to companies with sufficiently diversified operations or ones riding the wider sector’s coattails while remaining agnostic toward any specific company’s performance.
Tilray Brands (TLRY)
The closest thing you’ll find to a pure-play cannabis stock on this list, Tilray Brands (NASDAQ:TLRY) is the #1 global cannabis company by market share (clocking in at 13.4%). Moreover, Tilray is increasingly expanding its presence in the craft beer market. That includes buying diversified revenue streams, of course, but also developing a readymade logistic network and infrastructure set to capitalize on legalization the moment it happens.
Releasing its second-quarter earnings later today, Tilray stock has been on a winning streak in 2024, returning more than 15% since January 1st compared to the S&P 500’s relatively flat 10% increase. Analysts widely expect Tilray to post a 5 cent per-share loss for the quarter (they lost 4 cents per share this time last year) and an equally bearish outlook for the full fiscal year ending in August. If Tilray posts even moderately higher bottom-line stats or bullish surprises, the company’s stock could continue its winning streak and keep surging.
Turning Point Brands (TPB)
Turning Point Brands Inc (NYSE:TPB) falls firmly within the “picks and shovels” camp of the old gold rush trope. But, instead of selling those picks to cannabis companies, Turning Point goes where the cash is: selling branded products to the cannabis and tobacco consumers directly. Those picks and shovels include Zig-Zap rolling papers and cigar wraps, a perennial favorite among cannabis consumers. But like the other picks on this list of top cannabis stocks to buy, Turning Point capitalizes on wider cannabis trends while also including sufficiently diverse revenue streams to offset sector risk. Turning Point’s other properties include Stoker’s chewing tobacco and early expansion efforts into the growing oral nicotine substitute markets.
Those picks and shovels are profitable, as evidenced by the company’s recent 8% dividend hike. Still, the company trades at a relative discount, at just 9x earnings and 1.4x sales, compared to the wider sector’s 23x earnings and 2.65x sales states.
Innovative Industrial Properties (IIPR)
Growing high-end cannabis at scale isn’t as easy as sowing some seeds in disused rural farmland. Instead, the high-tech operations need tons of electricity, water, infrastructure – and space. Innovative Industrial Properties (NYSE:IIPR) is a REIT catering exclusively to the cannabis real estate segment. Since financing and banking tend to be tough for cannabis companies awaiting federal legalization, Innovative Industrial’s sale-leaseback programs are a welcome stopgap to get producers planting with fewer financial hurdles.
Selling land to cannabis producers is a profitable business. The company’s dividend yield is just north of 7%, beating fixed-income alternatives and even dividend mainstay REITs like Income Realty (NYSE:O), whose yield is just 5.7%. Likewise, Innovative Industrial’s end-of-year financial report indicates a sector on firm footing. The company’s funds from operations per share (a stand-in for EPS when considering REITs) hit $9.08 in 2023, up 7% from the prior year. The improved FFO came on the heels of a 12% sales bump and a 5% overall income improvement.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
