15 Best Cannabis Investments for 2022

2021 was a brutal year for cannabis stocks. The $1+ billion cannabis ETF MSOS ended the year down 29%, but if you invested in the right stocks your portfolio didn’t suffer too much. To be clear, 2021 was a year to short or trade cannabis stocks, not be full invested unless you were lucky enough to mostly invest in some the stronger ancillary plays like Power REIT (+159% YTD), urban-gro (+948%), or innovative industrial properties (+43%). A few multi-state operators (MSOs) did well like Goodness Growth (+15%) and MariMed (+84%), but overall plant-touching businesses got decimated due to Senate Majority Leader Chuck Schumer’s lack of cannabis legislative progress.

I’m a strong believer that 2022 will be the year we thought 2021 would be – the year fundamentals start to matter and institutional investors find a meaningful way into the sector.

WHAT TO AVOID

Stay away from pure California plays

In my view, investors will want to avoid pure California plays for at least the first half of 2022. While California is the largest cannabis market in the world, the black market still dominates. California politicians not only enforce high taxes at every level of government, but they are raising taxes on the farmers again starting this month. Also, there is far more supply than retails stores – some 8,000 growers and under 1,000 retailers thanks to the state issuing too many grow licenses and too many cities and towns prohibiting retail. This will change eventually, but it could take another year or two for retail to catch up to the supply. 2022 could see a lot of our California players close down or get acquired (and not for a great price).

Stay away from single state operators (SSO)

The multi-state model is far superior to the single state model, especially when the single state operators are in very mature states like California, Washington, Oregon or highly competitive recreational states like Nevada, Arizona and Michigan. For example, The Parent Company, C21 Investments, Hollister Bioscience, Harborside, and Next Green Wave saw serious revenue issues either due to lack of supply, regulatory issues or high competition against well funded, larger MSOs that have a significant capital advantage. Having all your eggs in one basket (all your revenue reliant on one state) is not a great strategy going forward.

WHAT TO BUY

Stick to the Tier 1 and stronger Tier 2s

Tier 1 and the stronger Tier 2s offer the best downside protection moving forward and thanks to better access to capital, should win the short and long game. The smaller players need SAFE Banking, the Tier 1s will continue to thrive in the short term with or without federal legislation thanks to large, single-digit debt deals where the smaller players sign double digit debt rates that usually offer warrants or are convertible debt – highly dilutive and destructive to profitability.

Here are the 15 best cannabis stocks based based on my thesis of avoiding California players, single state operators and Tier 3 or weaker Tier 2 stocks.

1: Trulieve (TCNNF) – $26.01

In my view, Trulieve offers the best downside protection with significant upside potential. Trulieve dominates the Florida market with over 50% of the market share. No other cannabis operator dominates a large state like Trulieve dominates Florida, the state considered by most to be the most profitable. The biggest upside for Trulieve is when Florida transitions from a medical marijuana state to a fully recreational state likely in 2024.

Thanks their M&A and capex strategy, the Trulieve now is also a market leader in Arizona and Pennsylvania (though not the lead it has in Florida) with a strong position in Maryland and Massachusetts. They were the first to offer sales in West Virginia and the only publicly traded MSO to get one of the Tier 1 vertical licenses in Georgia. Not only did the Harvest Health acquisition strengthen their Florida footprint, give them a leadership position in Arizona and Maryland, the deal also provided a wholesale business in Nevada and Colorado – a foothold for future growth opportunities.

Trulieve enters 2022 with an amazing balance sheet, a strong cash position with an attractive share price for continued M&A. Their strong cash flow allows for aggressive organic expansion without the need to further dilute or take on too much debt. It’s the stock to own in 2022.

You can check out their investor presentation here.

2: Verano (VRNOF) – $12.58

Picking Trulieve or Verano as your #1 is like picking who is your best child. No one was more aggressive in M&A in 2021 than Verano, spending around $1 billion in cash and stock.

Verano’s stock price has significant upside potential because to the company unluckily scheduling their IPO in Feb of 2021, the peak of the bull market and just before a 10 month bear market. The relentless selling pressure in the cannabis sector with several unlocks over 2021 devastated Verano’s stock price. Investors recently had a great opportunity to buy Verano below its February $10 IPO price.

Like Trulieve, Verano is very profitable (relative to other cannabis stocks) with amazing gross and EBITDA margins and has one of the best footprints in cannabis, in all of the key states expect New York. What separates Verano from most cannabis companies is their focus on premium cannabis (mostly indoor grow) and not having any sale-lease-back deals (they own all their real estate). Premium, indoor grow offers constant pricing, high margin pricing compared to lower quality flower and owning all our own properties allows for better debt financing.

You can check out their investor presentation here.

3 Columbia Care (CCHWF) – $2.86

While there are several MSOs that will benefit from New York, New Jersey flipping from medical use to recreational use marijuana in 2022 (New York still may be a 2023 story) and Virginia in 2023/2024, no one will benefit more than Columbia Care when it comes to the impact these states will have on revenue growth. Additionally, Maryland and Ohio have an excellent chance of passing recreational use in 2022 and Columbia Care is fully invested and maxed out in those states.

In New York, Columbia Care spend over $40 million buying a nearly 1 million sqft grow/processing facility on Long Island and they celebrated their first harvest in December. In New Jersey, Columbia Care is in the middle of finishing a 270,000 sqft grow/processing facility that will be one of the biggest, if not the biggest in New Jersey. In Virginia, the company has two of the 5 licenses in the state. Columbia Care was the first company to sell whole flower in New York and Virginia – flower being introduced will be significant revenue contributors in Q4 2021 and throughout all of 2022. New Jersey transitions to recreational sales in Q1/Q2 of 2022 and Virginia could start recreational sales as early as 2023 when Columbia Care will go from two to 12 stores by then.

Columbia Care is my #1 holding, but I have a higher risk tolerance than most and why I have Trulieve and Verano rated higher.

You can check out their investor presentation here.

4. Ayr Wellness (AYRWF) – $15.18

Of all the Tier 1 and 2 MSOs, Ayr held up the best in the first half of 2021, but then got punished the most in the last few months. This offers investors a great opportunity to get into a company with the lowest fully dilutive share count of all the Tier 1 and 2s.

Ayr’s initial story was Nevada and Massachusetts but the company quickly pivoted to Florida and New Jersey with acquisitions announced in December of 2020 that closed in 2021. Most recently, the company entered Pennsylvania, Ohio and Illinois, though only fully vertical in Pennsylvania. Ayr also recently purchased Levia, a strong cannabis beverage company. For me, Ayr has always been considered a 2022 story as significant assets get turned on in New Jersey, Massachusetts, Florida, and Pennsylvania, and they become vertical in Ohio and Illinois throughout the year.

You can check out their investor presentation here.

5. Green Thumb (GTBIF) – $22.16

Green Thumb has everything going for it – great leadership, some of the strongest brands, in all the right states, one the more profitable MSOs and has some of the strongest institutional support. They recently entered Minnesota and Rhode Island – very limited medical license states.

Green Thumb will be one of the best performing MSOs in 2022, but it does trade a higher premium on a sales or EBITA ratio than the four MSOs listed before it or it would be ranked higher. For example, Green Thumb trades at least twice the 2022 EBITDA multiple of Trulieve, Verano, Columbia Care or Ayr.

You can check out their investor presentation here.

6. Curaleaf (CURLF) – $9

Curaleaf is the biggest MSO by footprint and revenue and the only MSO in Europe in a meaningful way. They have a leading market share or near the top in just about every state they are in. I’ve avoided holding the stock (though have traded it) for most of 2021 because it traded at a significant premium to other Tier 1 MSOs yet had much lower margins than them. The stock price has come back down to earth at $9 – a great starting point to accumulate shares.

You can check out their investor presentation here.

7. Ascend Wellness (AAWH) – $6.57

Ascend Wellness is the only other Tier 2 on this list besides Ayr Wellness. Ascend has the best footprint of any of the Tier 2s and concentrated in the northeast – Massachusetts, Illinois, Michigan, New Jersey, Ohio and soon New York. Like Verano, Ascend scheduled their IPO at the peak of the bull market, just before a 10 month bear market, but unlike Verano, you can get Ascend well below its $8 IPO price. Ascend has some of the top brands in each state they enter and sell wholesale and retail equally.

You can check out their investor presentation here.

8. Village Farms (VFF) – $6.42

In my view, Village Farms is one of the few Canadian plays worth investing in for a few reasons:

– Unlike most Canadian LPs, Village Farms is growing revenue Q/Q and Y/Y

– They have a significant presence in Canada, the U.S. and Mexico, much of it produce but these facilities are likely available to convert to cannabis grow when legalization occurs in the United States and Mexico. 

– In Canada, the have the #1 brand in dried flower in Ontario, British Columbia, and Alberta, and they are a Licensed Producer in Ontario. 

– In the United States, they produce CBD and provides a pathway to the U.S. THC market once federally legal. They have 5.7 million sqft of grow in Texas that produces produce but will likely be partially converted to cannabis growing when permitted.

– Their Pure Sunfarms facility is expected to be EU-GMP certified in Q1 2022 which will allow the company to ship to Europe and internationally in the future. 

– They have commercial operations in Hong Kong and Taiwan for CBD. 

– Will be one of the biggest benefactors of U.S. interstate commerce with their massive grow facilities in Texas – likely years away, but that also allows for Village Farms to convert some of their produce grow to cannabis. Texas is also the last big state not to have a major medical program or rec use.

You can check out their investor presentation here.

9. Grow Generation (GRWG) – $13.05

Grow Generation is an ancillary, non-plant touching company that sells the hydroponic equipment like lights, trays, etc and the nutrition like fertilizer and plant food. Grow Generation was one of the best performing stocks in 2020, but one of the worst performing stocks in 2021 mostly due to their concentration in the California market and reliant on logistics impacted by shipping issues from China. I think it will be a strong performer in 2022 as major states like New York, New Jersey and Connecticut expand thanks to expanded medical programs and flipping to recreational use (though New York may be in 2023).

You can check out their investor presentation here.

10. Intercure (INCR) – $6.48

InterCure is an Israeli cannabis company with a former Israeli Prime Mister as its chairman. They have the exclusive Cookies license for Israel and Europe. While Israel and Europe are still medical only, Malta recently became the first European country to allow sales with Germany heading in that direction. As goes Germany, so goes the rest of Europe.

Quarter-over-quarter revenue growth of 36%, up from 35% the previous quarter – that means the revenue is execrating and taking market share. InterCure already had a very low share count and they did a share buy-back of 420k shares and post SPAC they received 5.2 million shares back from the SPAC sponsor because specific share price objectives weren’t met. That’s $56 million of market cap given back! The company now has just over 63 million shares outstanding – super low consider Curaleaf has 704 million and Green Thumb has 231 million. Impressive that they did a share buyback and decelerated earnings. 

Trading at 3x 2022 sales, the stock trades at the valuation of a tier 1 MSOS, but remember it’s outside the US so it trades on the US exchanges, so it is very cheap compared to Canadian LPs like Canopy (6.3x) or Conos (18x). 

You can check out their investor presentation here.

11. MariMed (MRMD) – $0.86

MariMed is the only Tier 3 stock I have on the list. While the stock gained 84% in 2021, it heads into 2022 still a relative unknown, but it shouldn’t be. The company one of the widest footprints of the Tier 3s operating in five states and the stock trades at less than 2x 2022 estimated sales.

You can check out their investor presentation here.

SPECULATIVE PLAYS

These are some stocks that have some of the highest risk/reward and should only make up a small part of your portfolio. Last year I had Power REIT (+158% return) and Clever Leaves warrants (-70%) as speculative plays and as you can see they can be hit or miss.

12. MSOS call options

Options are high risk, high reward that offers significant leverage (you pay a fee for the right to buy 100 shares in the future, if the strike price is met). Based on your risk tolerance, you can buy in or near the money calls ($20 to $30 for less risk) or a strike price much higher for a higher risk/reward. Regardless, you should consider Jan 2023 or Jan 2024 call timeframe to give yourself plenty of time to either realize some gains or to exercise your options (buy 100 shares).

13. Agrify (AGFY) – $9.20

Until a recent short report came out, I did not consider Agrify a highly speculative play (just speculative), but it clearly is now. The company is losing money, not even close to being profitable and has no major MSOs paying for services, but it does offer a highly productive vertical grow options for cannabis producers to maximize their space and crop yield. Agrify’s recent M&A got them into the processing businesses. The company has a lot of cash and no debt with a research deal with Curaleaf – the stock could skyrocket should Curaleaf sign a deal with them.

You can check out their investor presentation here.

14. urban-gro (UGRO) – $10.48

urban-gro designs/engineers grow facilities – not just for cannabis. One benefit they have over Agrify is that they do not hold or manage investors – they are a service company, not a selling of hardware. They are also well diversified into food and have a better financial outlook than Agrify.

You can check out their investor presentation here.

15. Leafly warrants (Merida Merger SPAC – Ticker: MCMJW) – $1.06

Warrants offer investors a cheap way to own the right to purchase a stock at a future date (if the stock hits the strike price). Merida Merger SPAC is taking the popular marijuana website Leafly.com public. The risk with SPACs is they don’t always close (high risk with warrants) and when they did close in 2021, were brutalized (See The parent Company and Glass House). I think Leafly will do fine in 2022 and the warrants will outperform the stock.

You can check out their investor presentation here.

Full disclosure: I currently own every stock on that list expect urban-gro, Marimed and Green Thumb.