It feels like change is in the air for the U.S. cannabis industry, which has been beaten down throughout much of the past two years. However, President Biden’s recent moves related to marijuana reform have reignited investors’ interest in cannabis companies.
In particular, Biden’s direction to the U.S. Attorney General and the Secretary of Health and Human Services to review federal marijuana scheduling under the Controlled Substances Act generated enthusiasm. If marijuana is indeed rescheduled, the change would have a significant impact on the U.S. cannabis industry.
Three companies stand out as good representatives of the different segments of the cannabis industry. Cresco Labs (CRLBF -0.61%) ranks as one of the biggest marijuana producers and retailers. Innovative Industrial Properties (IIPR 3.80%) is the leading provider of real estate capital to cannabis operators. Scotts Miracle-Gro (SMG 0.93%) is the top supplier of hydroponics and gardening products to the industry.
Could these three marijuana stocks skyrocket in 2023?
1. Cresco Labs
Shares of Cresco Labs have plunged close to 80% from the high set in early 2021. The stock is down around 50% so far this year. Investors hope that 2023 will be a better year for Cresco.
It remains to be seen, though, just how much of a catalyst President Biden’s actions will provide for the stock. If marijuana is rescheduled to a less restrictive classification but remains illegal at the federal level, Cresco won’t benefit very much, if at all. However, if marijuana is removed from the list of scheduled drugs under the Controlled Substances Act, that’s a different story altogether.
Keep in mind that this wouldn’t result in full marijuana legalization across the U.S. But it would almost certainly drive Cresco’s share price much higher. It could also pave the way for Cresco to list its shares on a major U.S. stock exchange.
Even if marijuana rescheduling doesn’t help Cresco in 2023, another major development could. The company expects to close on its pending acquisition of Columbia Care by the end of this year. Assuming there aren’t any roadblocks, this transaction will put Cresco in the top spot in several of the leading cannabis markets in the U.S.
I think there’s a good chance that Cresco Labs stock will indeed skyrocket in 2023. If the current headwinds for the cannabis industry persist, though, the rebound could take more time to materialize. But I expect that the stock will be a big winner for long-term investors.
2. Innovative Industrial Properties
Innovative Industrial Properties is a real estate investment trust (REIT) that focuses on the U.S. regulated cannabis market. The company isn’t immune to challenges in the cannabis industry, as evidenced by the stock’s steep decline this year.
Investors have been especially concerned about the financial stability of some of IIP’s key tenants. In particular, Kings Garden, which generated 8% of the REIT’s total rental revenue in the first half of 2022, defaulted on its lease payments in July.
IIP should benefit from any developments that improve the financial outlook for its tenants. Removing marijuana from the list of scheduled drugs would definitely qualify. But the prospects of that happening are uncertain.
The stock could still bounce back significantly in 2023, though. An easing of the supply and demand imbalances in the U.S. cannabis market would bolster IIP’s tenants financially and lower the REIT’s risk. IIP also might be able to work out terms with Kings Garden or lease the six properties in question to another cannabis operator.
3. Scotts Miracle-Gro
Scotts Miracle-Gro is unique in that its fortunes don’t totally hinge on the cannabis market. The company is also a leading supplier of U.S. consumer lawn and gardening products. However, Scotts stock has fallen even harder year to date than many pure-play marijuana stocks.
Some of the company’s woes were due to adverse weather conditions that negatively impacted sales of its consumer lawn and gardening products. Scotts’ Hawthorne Gardening segment, which focuses on the cannabis market, continues to feel the sting of the excess cannabis supply that’s reducing sales of hydroponics products.
Both of these should only be temporary issues for Scotts. The problem, though, is that no one knows how long it will take for the company to return to profitability.
Still, major cannabis reform would likely provide a big catalyst for Scotts Miracle-Gro if it happens next year. Even if it doesn’t, the stock should eventually recover. Scotts doesn’t need a miracle to become a growth story again.
Keith Speights has positions in Innovative Industrial Properties. The Motley Fool has positions in and recommends Cresco Labs Inc., Innovative Industrial Properties, and Scotts Miracle-Gro. The Motley Fool has a disclosure policy.
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