Top Ancillary Cannabis Stocks To Buy? To Helping Cannabis Grow

Ancillary Cannabis

The downward trend for markets thus far this year has had a disproportionate impact on cannabis stocks. The S&P 500 index is down 12% this year, but cannabis ETFs AdvisorShares Pure Cannabis and EFTMG Alternative Harvest are down 36% and 26%, respectively.

That’s disconcerting for investors, but mixed in with all that bad news is a chance to buy in on solid cannabis companies whose shares are depressed but have strong financials.

New Lake Capital Partners and Grow generation

 

New lake Capital Partners (NLCP 1.85%) and GrowGeneration (GRWG 1.46%) are ancillary cannabis companies. They do not hold licenses for cultivating, producing, manufacturing, selling, transporting, or distributing cannabis products, but they enjoy the money made by cannabis producers.

Take the long-term view: the worldwide cannabis market is expected to have a compound annual growth rate (CAGR) of 32.04% through 2028, growing to be a $197.74 billion business by that pointconsistent with a study by Fortune Business Insights.

Investing in companies that are strong financially and well positioned to benefit from that growth is sensible.

New Lake Capital Partners, a cannabis landlord

New Lake Capital Partners may be a real estate investment trust (REIT), just like the better-known Innovative Industrial Properties, focusing on leasebacks to cannabis companies.

New Lake, which went public last August, buys cannabis companies’ cultivation facilities and dispensaries, freeing up cash for those companies, then leases those properties back with triple-net leases that put most costs on the tenants.

The company’s shares are down quite 21% this year, but it is easy to see it has a solid business plan. Since it was founded in 2019, it’s purchased 29 properties representing 1.5 million square feet.

Its tenants include well-known cannabis companies Trulieve, Cresco Labs, Curaleaf, and Columbia Care, and as of March, all of its properties were rented therefore, the company has had no tenant defaults on deferrals. Its leases are future, spanning a mean of 14.5 years. It’s $127 million in cash and only $2 million in debt.

Last year, NewLake posted revenue of $28.2 million, up from $11.7 million in 2021, and the net was $11.2 million, up from a loss of $10.7 million. More importantly, the company’s funds from operations (FFO) were $19.1 million, compared to an FFO loss of $8.1 million in 2020.

New Lake also reported an FFO per share of $1.09, compared to an FFO per share loss of $1.14 in 2020.

Perhaps the foremost enticing thing about NewLake is its hefty dividend. The corporate has raised its dividend for four consecutive quarters, and at $0.33 a share, it offers a yield of 5.87%.

There are some concerns to think about, though. It’s still a small company, so it doesn’t have the maximum amount of built-in diversification as Innovative Industrial Properties.

New Lake must also continue growing to keep up with its dividend offerings. Last year, the corporate had an adjusted FFO of $1.20, but its current rate of dividends pays out $1.32 per share annually.

That’s an AFFO payout ratio of 110%, which, even for a REIT, would be unsustainable within the long haul — unless it continues to increase FFO. Fortunately, it’s little debt, so it can afford to shop for and lease more properties.

GrowGeneration, founded in Colorado in 2014, is the largest chain of specialty hydroponic and organic garden centers in the United States, with 63 retail and distribution centers across 13 states.

Hydroponics, the tactic used to grow plants indoors without soil but in a nutrient solution root medium, is often used for nearly any plant.

Still, it’s especially useful to grow cannabis commercially and for peopleConsistent with a report by Mordor Intelligence, the expected CAGR for the hydroponics industry is 7.8% from 2022 to 2027.

It stands to reason that the corporation should benefit as more states decriminalize marijuana use and allow marijuana sales for medicinal and adult use. Why, then, is the stock down more than 54% so far this year?

The main reason is timing. The corporate had a rough fourth quarter while the markets soured a bit on cannabis stocks. The effect was a double whammy that has turned an overpriced stock into a stock priced to sell.

The company has more than doubled its annual revenue in the past four years and has quite doubled its annual net income over the past three years.

Last year, GrowGeneration reported revenue of $422.5 million, up 118.5% over 2020. The net was $12.8 million, up from $5.3 million in 2020.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $34.5 million, up 82%. The corporate also increased its gross profit margin last year by 160 basis points to 28%.

The bad news, though, was a fourth quarter that saw the corporate increase revenue by 46% year over year to $90.6 million, but with a net loss of $4.1 million, or $0.07 per share, compared to the net of $1.5 million and $0.03 per share within the fourth quarter of 2020.

The culprit within the loss was a drop in same-store sales by 12.3%, year over year.

Another note was the company’s revised guidance of net revenue between $415 million to $445 million and adjusted EBITDA of between $30 million and $35 million, which, even at the highest numbers, represents only a small increase from 2021.

In its fourth-quarter earnings call, GrowGeneration CEO Darren Lampert blamed the slowdown on a glut of outside cannabis in western states that led many growers to scale back production and expansion plans, curtailing demand for LED lighting and projects that would use GrowGeneration products.

However, the corporate said it doesn’t see the glut lasting as more eastern and northern states begin growing cannabis indoors.

Taking advantage of a chance

No one is saying that the cannabis business won’t increase for ancillary businesses. However, as this year has shown, there’ll be industry growing pains, particularly with companies like GrowGeneration and New Lake Capital Partners, both of which may be considered small-cap stocks.

Still, both companies have been consistently profitable and shown solid long-term gains, which shows they need the management expertise to survive short-term bumps.

The drop in their share prices now makes the stocks with reasonable price-to-earnings ratios more attractive, considering their expected growth.

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