If you’re looking for the top cannabis stocks to buy, I know an exchange traded fund (ETF) that has performed exceptionally well, relatively speaking, over the past three years. It’s down 32.7%, but that’s better than all the other major cannabis ETFs available.
The ETF is the Cambria Cannabis ETF (BATS:TOKE), an actively managed fund launched in July 2019. It is managed by Mebane Faber, a well-known portfolio manager. Faber’s Cambria Investment Management provides investors with 14 different ETFs, including TOKE, an aptly named stock symbol.
TOKE has over $9 million in net assets, has a dividend yield of 4.31% and paid 24 cents per share in 2023. If you’re feeling aggressive, here are three individual stocks held by TOKE to consider investing in directly. But keep in mind that cannabis stocks remain a risky proposition.
Imperial Brands (IMBBF)
Imperial Brands (OTCMKTS:IMBBF) is the third-largest holding in TOKE and makes up 8.38% of the ETF. It has a market capitalization of $18.5 billion.
The company’s main business is cigarettes. That’s not everybody’s cup of tea, but they generally provide consistent cash flow. Its cigarette brands include John Player Special, Winston, Kool and L&B. In cigars, it owns the Backwoods brand, well-known in the U.S. It owns the Blu brand in the vaping segment, acquired from Lorillard in 2015. In 2019, it created Pulze, a heated tobacco brand, and Skruf, a Swedish-created oral nicotine product.
Imperial dipped its toe in the newly regulated cannabis industry in 2022 by partnering with Auxly Cannabis Group (OTCMKTS:CBWTF), a Toronto-based cannabis producer. Imperial invested 75 million British pounds (USD $95.5 million) while granting the Canadian company global licenses for its vaping technology.
Last July, the two companies agreed to extend the debenture by two years to Sept. 25, 2026. The debenture has a conversion price of 81 Canadian cents (USD 60 cents), well above where it’s currently trading. It continues to work on rightsizing its business. Revenues for the first nine months of 2023 were up 6% over last year with a slight adjusted EBITDA loss, down 95% from a year ago.
Scotts Miracle-Gro (SMG)
Scotts Miracle-Gro (NYSE:SMG) is the fifth-largest holding in TOKE and makes up 7% of the ETF. It has a market capitalization of $3.73 billion.
While the company is best known for its lawn care and gardening products including Scotts, Miracle-Gro and Hyponex, its hydroponics business has recently dragged down its share price. It’s down 20% over the past five years and 74% since hitting $250 in April 2021, the gold rush days for cannabis. The company reported Q1 2024 results in early February.
“As we look to the year ahead, we are focused on driving top-line growth, tightly controlling expenses and delivering on our targets for free cash flow generation, gross margin improvement and aggressive debt paydown,” CEO Jim Hagedorn said in the company’s quarterly press release. “We are reaffirming our guidance of high-single digit growth in our consumer business, and in Hawthorne, we continue to take actions to ensure the business remains cash flow positive in fiscal 2024 and a major contributor to our debt paydown.”
While the CEO would never admit it, Jim Hagedorn probably wishes he’d taken a pass on creating the Hawthorne Gardening Company in 2014. It nearly took down the parent due to $1.7 billion in cannabis investments that have yet to pan out.
However, the core business is sound, and if Hawthorne can hang in there long enough to see federal marijuana reform, the shares are incredibly undervalued, but only for aggressive investors. While it might not currently be performing, with a little luck it could soon be one of the top cannabis stocks to buy.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties (NYSE:IIPR) is the ninth-largest holding in TOKE and makes up 4.9% of the ETF. It has a market capitalization of $2.74 billion.
The San Diego-based real estate investment trust (REIT) finished 2023 with revenue of $309.5 million, 12% higher than in 2022. Also, its adjusted funds from operations (AFFO) in 2023 were 10% higher year-over-year (YOY) at $256.5 million.
Based on an AFFO of $9.08 a share, the REIT’s shares trade at just 10.7x this cash flow. That’s low, given what kind of year it’s delivered for shareholders. The owner of industrial properties tenanted by licensed cannabis producers continues to be caught in the undertow faced by an industry that produced way too much inventory.
It ended 2023 with 108 properties in 19 states and 8.9 million rentable square feet of space. It collected 100% of the base rents and property management fees due in the fourth quarter. In addition, it finished the year with approximately $312 million in debt, just 12% of its $2.6 billion in total gross assets, none of which mature before May 2026.
With triple-net leases in place and 95.8% occupancy, weighted-average lease terms remaining of 14.6 years and no tenant accounting for more than 16% of its base rent, it’s in excellent shape as far as REITs go. This says to me that IIPR is not only the best cannabis stock to buy right now but also the cheapest and safest. It also currently yields 7.91%, making it the best in this bunch of top cannabis stocks to buy.
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.