MSOS - Investing in the Cannabis Industry: 3 Stocks to Buy Now

2023-11-08 13:29:30 ET

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When Joe Biden campaigned for president in 2020, there was no hope for cannabis stocks . Biden had been a hardliner on drug policy for most of the years he spent serving as a Senator. It made sense that he would carry this attitude into the White House.

However, as MJBizDaily.com pointed out in its Nov. 7 article about the rescheduling of marijuana by the Drug Enforcement Agency ( DEA ), Biden’s been a friend to the cannabis industry. “Love him or hate him,” said Andrew Kline, Denver-based senior counsel at national law firm Perkins Coie, “this industry should show him some appreciation,” MJBizDaily’s Chris Roberts reported.

The DEA may approve the Department of Health and Human Services ( HHS ) recommendation that marijuana be reclassified as a Schedule 3 controlled substance by the end of 2023. Unfortunately, even if the entire process gets accelerated, it doesn’t mean that the U.S. cannabis industry will suddenly be an easier one to navigate.

That said, it is an essential step in the federal legalization of cannabis. Here are three stocks to buy to be in position when it happens.

AdvisorShares Pure US Cannabis ETF (MSOS)

Call me a wimp if you must, but AdvisorShares Pure US Cannabis ETF (NYSEARCA: MSOS ) remains one of the best ways to play cannabis stocks because it’s one of the largest ETFs available.

MSOS holds all the big U.S. cannabis players, such as Green Thumb Industries (OTCMKTS: GTBIF ) and Curaleaf Holdings (OTCMKTS: CURLF ). These two account for nearly 37% of its $477 million in net assets.

Given how poorly cannabis ETFs have performed over the last five years, the fact that MSOS is only down 14% year-to-date (YTD) is a bit of a victory.

The biggest concern one should have about MSOS is that it’s very top-heavy, as I mentioned earlier. The top five holdings account for 81% of its net assets. If this were a tech fund, it might not be a big deal, but with the industry remaining in flux, an equal-weighted fund would be a better option for most risk-averse investors.

Just try finding one.

Innovative Industrial Properties (IIPR)

Innovative Industrial Properties (NYSE: IIPR ) is one of the few cannabis stocks that are up over the past five years. The owner of specialty real estate properties leased by licensed producers generates rent from these companies on a triple-net basis.

In the latest quarter, it generated $78 million in rent, collecting 97% of base rent and property management fees. That translated into $65 million in adjusted funds from operations, nearly 8% higher than a year ago.

As a result of its healthy cash flow, it paid $7.20 a share in dividends over the past 12 months ending Sept. 30, 6% higher than the same period a year earlier. Based on its current share price, it’s yielding a high 9.2%. As for its debt, it represents just 12% of its $2.6 billion in total gross assets. It has over $16 cash flow to cover $1 in interest and principal payments.

IIRP is currently operating a portfolio of 103 properties is 98.5% leased with a weighted average remaining lease term of 14.9 years. Each tenant represents at most 16% of its annualized base rent.

It continues to boggle my mind that investors aren’t more enthusiastic about its business model. Unless all of its tenants go out of business, which is unlikely, it will continue to generate healthy cash flow from its rental income.

Tilray Brands (TLRY)

Tilray Brands (NASDAQ: TLRY ) is not a stock you should buy if you have a heart condition. Its shares are incredibly volatile. In 2023, they traded over $3 on three occasions — February, August, and September — and below $2 on two occasions, the first go-round lasting almost three months.

On Sept. 18, Kerrisdale Capital released a short report about Tilray, suggesting it was nothing but smoke and mirrors. It used massive dilution to hide that its EBITDA (earnings before interest, taxes, depreciation and amortization) was nearly zero. Worse still, trading at 40x its “phony” EBITDA, as Kerrisdale characterized it, the actual value of its shares is less than a dollar.

I always felt Constellation Brands (NYSE: STZ ) did the right thing pursuing Canopy Growth (NASDAQ: CGC ) and a fourth revenue stream for its business (beer, wine, and spirits being the other three). Unfortunately, sometimes your bets don’t pay off, and Constellation was forced to abandon ship.

So, when Tilray started buying beer and spirits makers — SweetWater Brewing for $300 million in November 2020 and $103 million for Breckenridge Distillery in December 2021  — I thought it was headed down the same path but perhaps with a better outcome.

Kerrisdale writes about the crappy beer brands Tilray bought from Anheuser-Busch InBev (NYSE: BUD ). They were made crappy by the world’s biggest brewer, whose most recent failure with Bud Light highlights a company with more than 300 awful beer brands .

I’m not suggesting for a minute that CEO Irwin Simon isn’t playing fast and loose with Tilray stock, but all of the companies Kerrisdale mentions who’ve received stock from the company could have said no. However— they didn’t.

Why is that?

On the date of publication, Will Ashworth 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 .

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