Investor sentiment behind cannabis stocks has swung wildly over the past several years. It always seems to be a case of weighing the opportunity for further legalization against the fundamental realities of the sector. Years ago, when the sector opened up, sentiment was sky high. More recently, as profitability remains elusive, sentiment has waned.
Further legalization will open up new avenues for revenue generation which will, in turn, bring firms closer to profitability. Profitability will be the paramount factor for investors overall.
Very few cannabis stocks have managed to reach profitability despite a patchwork of legality. Firms can operate in multiple states and in Canada. Yet, profitability remains elusive.
Despite overarching issues, the firms discussed below have managed to operate effectively in the difficult sector. Let’s take a look at three of those cannabis stocks that represent sensible investments.
Green Thumb Industries (GTBIF)
Green Thumb Industries (OTCMKTS:GTBIF) stock is one that I always come back to when I discuss the cannabis industry. It is the rare exception to the rule that cannabis firms are unprofitable.
Green Thumb Industries reported a GAAP net income of $36 million in 2023. The company managed to eke out that profit on $1.1 billion in revenues. The company sells various cannabis consumer packaged goods while also operating dispensaries.
Again, Green Thumb Industries is a rarity within the cannabis industry, as profitability is very difficult to find. It’s also very common to see losses extending into the hundreds of millions of dollars from well-known cannabis names.
Those strong operations are not the only positive news coming out of the firm. Green Thumb Industries announced that it is initiating a $50 million increase in its share repurchase program, boosting the total value to $60 million.
It’s very clear that the company’s shares are among the very best investments in the cannabis industry.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties (NYSE:IIPR) is a commercial REIT stock which might raise red flags for some potential investors. After all, commercial real estate is in the dumps.
However, the commercial mortgage rate provides financing to the cannabis industry. The cannabis industry is expected to grow, while general REITs are expected to shrink. Office space is not hot, nor is it expected to improve. The cannabis sector however is expected to grow.
Innovative industrial properties is also relatively stable given that its dividend has not been reduced since 2017. Meanwhile, many other commercial REITs have reduced their dividends recently as the sector falters.
That dividend currently yields 7.7%. Investors might be worried to learn that the stock has an associated payout ratio of 1.25. However, payout ratios above one are common in REITs. Funds from operations are a more accurate measure by which to judge the strength of a given REIT. Fortunately, Innovative Industrial Properties’ FFO was $2.07 during the most recent quarter, besting expectations of $2.02.
Cronos Group (CRON)
Cronos Group (NASDAQ:CRON) is another cannabis stock to consider, simply because the firm is headed in the right direction. Like so many other cannabis firms, Cronos continues to produce losses.
However, Cronos is clearly headed in the right direction and firmly understands that profitability is the primary method by which it will succeed. Net losses are narrowing while gross profits are increasing. That’s a perfect recipe for a path from net losses to net income at some point in the future.
Overall, revenues are essentially flat across much of the cannabis sector. Top-line growth is difficult to come by and Cronos has certainly fallen in line with that trend. Fourth quarter revenues increased by 1%. Meanwhile, gross profit margins and gross profit overall both increased.
During that same time frame net losses declined from above $157 million to below $58 million. If the company continues this trajectory it isn’t irrational to consider that it may escape penny stock status in the future.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.