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5 Top Small-Cap Marijuana Stocks to Buy for the Long Term

Sean Williams, The Motley Fool

When investors look back on the cannabis industry a decade from now, they're liable to find one of the fastest growth trends on the planet. Depending on your preferred Wall Street source, legal marijuana sales could hit between $50 billion and $200 billion annually 10 years from now.

However, it may not be the best-known mid-cap cannabis stocks that lead the charge higher. Instead, I believe small-cap marijuana stocks with unique business models are poised to outperform their larger counterparts over the long run. Here are five small-cap cannabis stocks you can consider buying right now that should outperform the best-known pot stocks.

A handful of dried cannabis buds lying atop a messy pile of cash.

Image source: Getty Images.

Planet 13 Holdings

Arguably the most intriguing small-cap of the bunch is vertically integrated dispensary operator Planet 13 Holdings (OTC: PLNHF), which is headquartered in Las Vegas, Nevada. Unlike most dispensary operators, which are opening as many grow farms, processing sites, and retail locations in legal U.S. states, Planet 13 is focused solely on making its stores a must-see for cannabis consumers and enthusiasts.

Just west of the Las Vegas Strip, Planet 13's SuperStore is slated to be the largest marijuana retail store in the world at 112,000 square feet. For context, that's larger than the typical Walmart. Aside from a huge selection of dried cannabis product and derivatives, the SuperStore will also host an events center, pizzeria, coffee shop, and consumer-facing processing center. Since opening in November, the Planet 13 SuperStore has seen its average daily visitor count more than double, with the average ticket for paying customers rising by about $12. There's simply no other dispensary operator that can provide the experience that Planet 13 can. 

Additionally, Planet 13 has done an admirable job of incorporating self-pay kiosks into its SuperStore to improve checkout speed (allthough consumers still need to wait for budtenders to package their product), and has an immaculate store layout that's designed to drive high-margin sales. With Planet 13 being incredibly transparent with its monthly sale reports, and operating in a state that's expected to lead all others in per-capita cannabis spending by 2024, Planet 13 looks like a good bet to outperform.

A vape pen next to a vial of liquid and neatly arranged dried cannabis flower.

Image source: Getty Images.

KushCo Holdings

Ancillary marijuana stocks typically tackle one thing very well. In the case of KushCo Holdings (OTC: KSHB), it has a three-pronged business model that makes it unique among ancillary companies.

KushCo currently generates most of its revenue from the sale of vaporizers. Canada is set to launch derivative products -- e.g., vapes, edibles, infused beverages, topicals, and concentrates -- in licensed cannabis stores by mid-December. Since derivative products have significantly higher margin potential than dried cannabis flower, they're an absolute must-have product offering for growers. And among derivative products, vapes are projected to lead the charge (at least in Canada) in aggregate sales. That puts KushCo in good position to be a leader in vaporizer sales moving forward.

Secondly, KushCo provides packaging and branding solutions to cannabis growers. Every legalized country, state, county, or locale can have differing laws on cannabis. KushCo is responsible for creating packaging that complies with those laws, as well as allows individual growers to stand out in an increasingly competitive marketplace.

Lastly, KushCo is a supplier of hydrocarbon gases and solvents, which are used in the respective production of cannabis oils and concentrates. Again, with derivatives viewed as a hot commodity, KushCo's role as a middleman for the pot industry should allow it long-term success.

A gloved hand holding a full dropper and vial of cannabidiol liquid in front of a hemp plant.

Image source: Getty Images.

MediPharm Labs

Keeping with the ancillary theme, another small-cap pot stock investors can consider buying right now for the long run is extraction-services provider MediPharm Labs (OTC: MEDIF).

Similar to KushCo, the allure of MediPharm is the push toward derivative production in Canada. MediPharm Labs is capable of taking cannabis and hemp biomass and using its extraction technology to produce targeted concentrates for its clients. MediPharm is currently working on expanding its annual run-rate processing capacity to 500,000 kilos per year.

To date, MediPharm has already landed a number of major clients, including the largest marijuana stocks in the world, Canopy Growth, premium-quality producer Supreme Cannabis Company, and Cronos Group. The latter is arguably MediPharm's most notable deal, with Cronos contracting for $30 million worth of concentrates over an 18-month period, with the option of doubling the contract value to $60 million over 24 months.

This is also a company that's dazzled on the earnings front. Whereas most pot stocks are still losing money, MediPharm's most recent quarter yielded a small net profit. That's pretty impressive considering that the company only ramped up extraction operations during the fourth quarter. With plenty of predictable cash flow from its contracts, MediPharm Labs' profitability should improve for the foreseeable future.

An up-close view of a premium flowering cannabis plant in an indoor grow farm.

Image source: Getty Images.

Flowr Corp.

Even though it's been beaten to a pulp recently, specialty grower Flowr Corp. (OTC: FLWPF) is another small-cap marijuana stock that long-term investors should seriously ponder buying.

There are two factors that allow Flowr to stand out from the crowd. First, this is a company focused on premium and ultra-premium dried flower and derivative production at its Kelowna campus in British Columbia. Whereas most growers aim to produce as much marijuana as possible (often of discount or average quality), Flowr has chosen quality over quantity. Kelowna's primary grow site may only be capable of 50,000 kilos of peak output per year, but it should face little supply or pricing competition. In fact, Flowr was one of the few pot stocks to see a per-gram increase in the price of dried cannabis sold in recent months.

The other factor that's really intriguing here is Flowr's recently completed acquisition of Holigen. Already owning a 19.8% stake in Holigen, Flowr announced in late June that it would acquire the remainder of the company in a cash-and-stock deal. Holigen's Aljustrel outdoor cultivation facility in Portugal spans 7 million square feet and could yield as much as 500,000 kilos per year when fully operational. This output, along with the Flowr Forest adjacent to Kelowna, could make Flowr a major grower that's trading at a significant discount. 

Also, keep in mind that while outdoor-grown weed is unlikely to come anywhere close to the quality or yield efficiency at Kelowna, Aljustrel's location in Portugal is perfect as a supply source to Europe's burgeoning medical cannabis industry. Plus, Flowr can use this supply to produce higher-margin derivative products.

A large marijuana dispensary sign with a cannabis leaf and the word dispensary written underneath it.

Image source: Getty Images.

Trulieve Cannabis

A fifth and final small-cap cannabis stock you'd be wise to add to your buy list is Florida-based vertically integrated dispensary operator Trulieve Cannabis (OTC: TCNNF).

Similar to Planet 13, Trulieve offers something different other than the unbridled countrywide expansion we've witnessed from most retailers. What makes Trulieve unique is its focus on its home state of Florida. Despite having only legalized medical cannabis, Florida has delivered big-time sales growth and profitability to Trulieve. The company has opened 30 stores in the Sunshine State, allowing it to keep its expenses close to the vest, so to speak, as well as effectively build its brand.

Mind you, Trulieve does have plans to push into markets. It already has a presence in California, the state with the highest projected annual legal pot sales, as well as Massachusetts and Connecticut. It'll likely take some time for Trulieve to establish a strong brand presence in these states as it's done in Florida, but it certainly has a blueprint for success to lean on as it expands.

And, as noted, Trulieve is already very profitable. No other pot stock is trading at a lower forward price-to-earnings ratio than Trulieve Cannabis. That makes it one of the few true value plays in the marijuana industry.

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Sean Williams owns shares of KushCo Holdings. The Motley Fool recommends KushCo Holdings. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com