Will 2024 be the year that cannabis stocks come back into their own?
Though recreational and medical legalization is inching along, state by state, cannabis stocks haven’t come close to touching past highs. Cannabis’ lost investor enthusiasm comes primarily from two core concerns: legalization and differentiation.
The first issue is self-evident but more nuanced than you might expect. Rather than being a pure market opportunity function, a range of legal concerns swirl around cannabis stocks – even in “legal” states. For example, until cannabis is federally legalized (or rescheduled), companies struggle to find banking partners and can’t leverage common business tax advantages.
The second issue of differentiation describes the way a cannabis stock sets itself apart from its peers. Practically speaking, aside from legality, there are zero barriers to entry if you want to get into the cannabis business. At the same time, products are similar enough to one another. Unlike soda brands, few consumers have a specific preference for one company over another.
At this point, legalization is a waiting game. But to find the best undervalued cannabis stocks, you need to identify those with a differentiating factor, such as these three.
Tilray Brands (TLRY)
Tilray Brands (NASDAQ:TLRY) is one of the most well-known cannabis stocks.
Also, the company began making further inroads into the craft beer brewing market last year. But, it was far from an admission of defeat within the cannabis industry or a mere diversification tool. Tilray’s purchase of eight craft beer brands from Anheuser-Busch (NYSE:BUD) marked the best differentiation tool investors could ask for.
In addition to the brands themselves, including notables like Shock Top, Tilray bought itself a baked-in distribution network, marketing machine, and legal compliance institutional knowledge. Beverage companies have long studied and perfected the art of getting liquid past consumers’ lips. So, Tilray took a shortcut by simply buying decades’ worth of institutional knowledge.
That bodes well for Tilray’s ongoing focus on cannabis-infused drinks. If, and, or when cannabis is legalized, Tilray is set to push products along existing supply chains rapidly. The early entry makes Tilray the first to market in a competitive space and establish early dominance. And with Tilray trading in virtual penny stock territory, it’s hard not to call it the most undervalued cannabis stock of the year.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties (NYSE:IIPR) is an undervalued cannabis stock, but it isn’t developing consumer products. Instead, IIPR is selling picks and shovels to gold miners.
In this case, the miners are cannabis companies, and the picks and shovels are much-needed operating spaces. IIPR owns and leases property to licensed cannabis companies for industrial purposes. Right now, it owns more than 100 properties, sitting at 98.5% occupancy. And leasing companies are signed for 15-year leases, on average. That kind of predictable cash flow is rare even among REITs, let alone cannabis operators!
Likewise, IIPR’s financials are strong. Its November 2023 filing pointed to a 10% year-over-year (YOY) revenue increase, with adjusted funds from operations climbing 7.8% over the same period. On the heels of its financial strength, IIPR’s annual dividend peaked at $7.22 per share. That represents a 7.75% yield, giving investors some cash flow while they wait for the wider cannabis industry to mature.
Valley National Bancorp (VLY)
Valley National Bancorp (NASDAQ:VLY) covers the other core problem facing cannabis operators today – banking.
Unlike many larger, legacy financiers, Valley National is happy to service cannabis companies under its “Cannabis-Related Business Banking” wing. These offerings increase security for cannabis companies. Often, exclusion from traditional banking means they must otherwise operate in cash. This poses a tricky proposition and one that opens companies up to fraud, if not outright theft.
Like cannabis stocks, small regional banks should bounce back in 2024, so Valley National is on the cusp of capturing two sectors’ upside. Today, its shares trend towards deep undervaluation, considering it trades at just 0.81x book value.
Like IIPR, Valley National also offers a dividend to keep investors happy as they wait for the cannabis banking sector to explode. In this case, it’s a bit slimmer than IIPR’s at 4.46% total yield, but still nothing to sneeze at.
On the date of publication, Jeremy Flint held no position in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
