Most cannabis companies have seen their shares drop so far this year, as lowered profits, the slow pace of legalization and expectations have scared investors off. The AdvisorShares Pure Cannabis ETF (YOLO 1.97%) is down than 49% this year while the ETFMG Alternative Harvest ETF (MJ 0.85%) has fallen more than 39%.

NewLake Capital Partners (NLCP -0.29%), Cannacord Genuity (CCORF -0.22%) and Trulieve (TCNNF -5.35%) have not been immune to investors’ concerns and their shares have fallen asl well, even though all three are financially strong enough to last until the cycle for cannabis investing swings back in their favor.

NewLake is small but growing fast

NewLake Capital Partners is the new kid on the cannabis real estate investment trust (REIT) block. It just had its IPO last August and its market cap of $455 million is overshadowed by the $3.82 billion market cap of Innovative Industrial Properties (IIPR 0.38%), its main competitor. Both REITs specialize in lease-backs to cannabis companies, where they provide capital to cannabis operators by buying cultivation and retail properties, then renting the properties back to the cannabis companies with triple-net leases that put most maintenance expenses on the tenants.

In the first quarter, NewLake reported $10.2 million in revenue, up 13% sequentially while net income was listed as $5 million, up from $4.3 million in the prior quarter. More importantly, the company continues to grow funds from operations (FFO) and said in the first quarter it had $7.7 million of FFO, up 16.2% sequentially. Adjusted FFO was $8.1 million, up 15.7% over the fourth quarter of 2021. The company said it expects full-year revenue between $42 and $44 million, compared to the $28.2 million in revenue it reported in 2021. The company has 29 properties that are 100% leased and have an average lease term remaining of 14.3 years.

NewLake’s stock is down more than 28% so far this year, but its fundamentals are strong enough that it makes sense to buy the stock while it is at a discount, particularly because the company just raised its dividend by 29% to $0.33 per quarterly share, offering a yield of about 6.44%. The dividend appears safe as the company has a target of 80% to 90% of AFFO payout ratio, considered safe for a REIT.

Cannacord Genuity Crucial to Cannabis Businesses

Cannacord Genuity is a global investment bank that offers wealth management, brokerage, and investment services to retail, institutional, and corporate clients. The Vancouver company has offices in Canada, the United Kingdom, the United States, Europe, Australia and the Middle East. Cannacord isn’t a pure-play cannabis stock, but it frequently represents merger and acquisitions in cannabis.

Cannacord has had five consecutive years of increased revenue and three consecutive years of increased net income. However, it slumped in the first quarter, with $491 million in revenue, down 29.1%, year-over-year and $0.52 in EPS, down 56.7% from the same period last year. The drop has led to the stock’s falling by more than 28% this year.

It may seem counterintuitive, but I think right now is a good time to buy the stock for several reasons. The stock is priced, with a price-to-earnings ratio of around 4.95, well below what it should be considering the company’s stability. Also, mergers and acquisitions in the cannabis industry are not likely to slow down. We’re seeing a shakedown in the industry and more profitable and better-funded companies are consolidating licenses by buying out struggling cannabis companies. According to research by Cannabiz Media, of the 137 cannabis M&A deals it found over the past two years, Cannacord led with 22 of the deals, and was tops in representing the sellers and buyers.

Even if cannabis company mergers slowed, that’s really just a small part of Cannacord’s business. It is one of the most profitable wealth management companies in Canada with an operating margin (trailing 12 months) of 20.39 and has a low debt-to-equity ratio of 0.095.

On top of that, Cannacord offers something most cannabis companies don’t -- a quarterly dividend. It raised its dividend by 22% this year to $0.085 per share, representing a yield of 3.2% with a very safe cash dividend payout ratio of 12.88.

Trulieve will be a cannabis survivor

Trulieve, based mostly in Florida but with dispensaries in 11 states, as of the first quarter, leads all other cannabis retailers in revenue. The company reported first-quarter revenue of $318.3, more than $5 million more than Curaleaf, the second-largest company in revenue rankings. 

Despite its size, Trulieve continues to show consistent growth as its quarterly revenue was up 64% year-over-year and 4% sequentially. The company also improved gross margin to 56%, up from 43.4% in the fourth quarter of 2021.

The only concern about Trulieve is, as it has expanded through acquisitions and new retail dispensary openings to 165 stores, it has gone from being a profitable company to on that is losing money. In the first quarter, the company had a net loss of $32 million, up 55% from the prior quarter, but down from the $30 million in net income it reported in the first quarter of 2021. Much of that can be chalked up to the $17.2 million in charges associated with the company’s purchase of Harvest Health & Recreation last year. 

That drop in net income is a big reason why the stock has plummeted more than 46% so far this year. This provides a better entry point for investors, however, as Trulieve is as prepared as any cannabis company to remain a major player in the industry. Last month, company insiders bought 31,650 shares of the company’s stock, taking advantage of the bargain price, for now.

Looking at its adjusted EBITDA of $105.5 million, an improvement from adjusted EBITDA of $100.9 million in the fourth quarter, the company appears to be making strides to get back to profitability.

Trulieve also reiterated 2022 guidance with expected revenue in the range of $1.3 billion to $1.4 billion and adjusted EBITDA in the range of $450 million to $500 million. That compares to revenue of $$938.4 million and adjusted EBITDA of $384.6 million last year.

Don’t wait too long

All three of these cannabis companies are too healthy to see their shares wallow for too long. Trulieve, once it absorbs its Harvest acquisition, will likely see increased margins that will bring it back to profitability. NewLake Capital Partners is really just beginning its runway, so I see a lot of opportunity there and Cannacord has enough geographic and revenue diversity to bounce back quickly. The latter two stocks also offer a dividend to reward long-term investors.