On October 17, 2018, Canada legalized cannabis for adult use. Since the debate leading to this legalization started, cannabis stocks have been all the rage. An entirely new market is emerging, and investors want to get involved early.
Investors have been so excited about cannabis stocks that we saw a bubble in the sector leading up to the legalization of adult-use marijuana in Canada. Since then, the cannabis bubble has popped and stock values have come back to reality. Now there’s a strong argument that the marijuana market is poised for a rebound. So, investors are flocking to the top cannabis stocks yet again.
With the cannabis sector in its infancy, there’s no doubt the companies that worked hard to take control early on will become the leaders of the industry in the future. Getting in on these early cannabis market leaders offers a substantial opportunity for long-term gains.
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5 Best Cannabis Stocks to Buy in 2020
When investing in emerging sectors, including investments in marijuana stocks, it’s as important as ever to make the right moves in the market. Any company with a remote similarity to companies within the sector will try to get involved. Due to market uncertainty and capital issues, many of the penny stocks in the marijuana industry will fail.
Nonetheless, where there’s risk, there’s generally reward. Making the right investments in a sector’s infancy can lead to vast long-run profits. If you’re thinking about investing in the cannabis industry and sharing in these potential long-term profits, the pot stocks below are a great place to start your research.
1. GW Pharmaceuticals (NASDAQ: GWPH)
Investing in an emerging sector involves quite a bit of speculation, so it’s best to look for investments that hedge these bets. Due to the regulatory concerns associated with cannabis, pot stocks are higher-risk than investments in other, less regulated industries. GW Pharmaceuticals gives investors an interesting way to get involved in the cannabis market while bypassing the debate over legalization for recreational use.
The company isn’t interested in growing cannabis or catering to the adult-use cannabis sector. Instead, GW Pharmaceuticals uses cannabinoids derived from the cannabis plant as key ingredients in the development of new therapeutic options.
GW Pharmaceuticals’ claim to fame is a treatment known as Epidiolex. The treatment is a highly-refined form of cannabidiol, or CBD, that was developed as a treatment for seizures associated with Dravet syndrome and Lennox-Gastaut syndrome in younger patients ages two and older. It is also the product that gives GW Pharmaceuticals the crown as the first biotech company to receive U.S. approval for a cannabis-related drug.
Because Epidiolex has proven to be far more effective than standard-of-care therapies like clobazam and valproic acid while greatly reducing side effects in its target patient population, the treatment has seen incredible adoption rates in the space. The growing sales of the drug are a driving force behind the company’s compelling year-over-year revenue growth, which clocked in at more than 68% in the second quarter of 2020. In the second quarter, the company generated $117.7 million in net sales of Epidiolex.
GW Pharmaceuticals is also a prime beneficiary of the recent United States Farm Bill passed in December of 2018. This bill reclassified CBD products and hemp, separating them from cannabis, which remains a Schedule I substance controlled by the Drug Enforcement Administration (DEA) in the United States. With CBD being the main ingredient in Epidiolex, GW Pharmaceuticals will benefit from reduced costs and increased accessibility, ultimately assisting the company in margin growth moving forward.
GW Pharmaceuticals is by no means a one-trick pony. The company is currently in the late stages of development of a treatment known as Sativex, another cannabis-based therapeutic option. This treatment centers around the use of cannabis extracts THC and CBD as potential options for patients with multiple sclerosis (MS). Should this treatment be approved, it has a strong chance of becoming yet another blockbuster and major revenue driver for the company.
Beyond Epidiolex and Sativex, the company has two other cannabis-based clinical candidates that are the subject of four clinical development programs. With multiple clinical development programs currently underway, revenue growing at a breakneck speed, and Sativex being on the verge of reaching the market, GW Pharmaceuticals’ stock is one for the watchlist.
2. Cronos Group (NASDAQ: CRON)
Cronos Group operates on the opposite end of the cannabis market from GW Pharmaceuticals. The company is focused on recreational cannabis and has quickly become one of the biggest companies in the marijuana market.
A major part of the growth seen from Cronos Group has to do with an investment made by American tobacco company Altria. The maker of Marlboro, Parliament, and Virginia Slims cigarettes saw value in the cannabis industry early and saw Cronos Group as one of the best marijuana stocks on the market.
So, in late 2018, Altria invested $1.8 billion into Cronos Group, bolstering what has become one of the most impressive balance sheets in the cannabis industry. This may be surprising, considering that Cronos only generates between $300 and $400 million in revenue per year. So, what did Altria find interesting enough about the company to make a $1.8 billion investment in a comparatively small marijuana company?
Cronos Group is one of the key cannabis growers in Canada, helping to support the country’s booming cannabis business. However, that’s just one part of the company’s work. The company is also actively involved in penetrating other markets around the world. The biggest of these markets is the United States, and tapping into this market has the potential to lead to skyrocketing valuations.
At the moment, there are only eight states in the U.S. that have not decriminalized or legalized cannabis in some way. Although marijuana is still illegal on the federal level, the push from state to state to decriminalize or legalize the plant suggests that federal legalization of adult-use cannabis will come down the line sooner rather than later.
Cronos Group is uniquely positioned to capitalize on the legalization of cannabis in the U.S. Given the company’s success in the Canadian market, similar success in the United States market would drive far higher revenues on account of the much larger size of the U.S. economy.
All Cronos would need to take the U.S. market by storm is a strong partner that can guide the company through the unique regulatory environment in the region. So, the Altria investment in Cronos Group turned out to be a match made in heaven.
If and when cannabis becomes legal in the United States, Cronos Group has the ability to grow enough of the product to meet demand. And, as a big tobacco player in the U.S., Altria group understands marketing, manufacturing, and sales of highly regulated products in the region. Between the two, the potential for complete U.S. marijuana-market dominance is there.
Cronos is a highly speculative play. Much of the value of the investment lies in the United States legalizing cannabis for adult use over the next few years. However, should this take place, the potential for gains is hard to ignore, making Cronos one of the top stocks in the cannabis market and one that’s well worth watching.
3. Canopy Growth Corporation (NYSE: CGC)
Canopy Growth Corporation has quickly made a name for itself. The company is among the top three cannabis companies in the world by market cap and has become the largest cannabis producer in Canada. That’s nothing to shake a stick at.
Like Cronos Group, Canopy Growth Corporation has also attracted high-dollar investor interest from a U.S. company operating in a heavily regulated market. Constellation Brands, best known for its alcoholic beverage brands like Corona, Modelo, and Casa Noble, made a $4 billion investment in Canopy Growth Corporation in August 2018.
As a result, Canopy Growth Corporation’s balance sheet is at least as impressive as that of Cronos Group, ranking as one of the top two best balance sheets in the cannabis market.
However, the company recently missed revenue expectations, leading to serious declines in the value of the pot stock. This proved to be exceptionally painful, considering that competitors Tilray and Aurora Cannabis both beat expectations prior to the Canopy Growth Corporation report.
Nonetheless, there’s a strong argument that the weakness seen in the stock as a result of a revenue miss creates a buying opportunity. Moreover, analysts are expecting a strong recovery, which pairs well with the idea that Canopy Growth is highly undervalued.
As a long-term play, Canopy Growth Corporation may be one of the best cannabis stocks on the market today. It may take the company some time to reach profitability following the disappointing revenue growth, but it can afford to wait. Canopy Growth has multiple billions of dollars in cash and is in the process of using some of this cash to acquire smaller companies and assets.
When a market is in its infancy, companies that work hard to take control of the industry will generally become its long-term leaders. That’s exactly what Canopy Growth Corporation is doing. With such a strong balance sheet, the company is setting profitability on the back burner and focusing on building up its assets to a point where no other company in the space will be big enough to compete.
This is the same type of play made by Amazon.com early on. The company hemorrhaged money to build infrastructure and create a better user experience. Many wondered if the company would ever turn a profit. Today, Amazon.com is one of the most profitable retailers in the world, and there’s no sign of the company’s growth slowing.
Canopy Growth is in a similar position. It’s got the money to spend, and it plans on doing so in order to build the potential for extreme long-run value. That makes this cannabis stock one that’s worth considering diving into.
4. Aurora Cannabis (NYSE: ACB)
Canadian cannabis producer Aurora Cannabis is a company that many investors in the space are expecting to decline. However, the investing great Warren Buffet has suggested that the best moves to make in the market are the moves that go against popular opinion. When fear is high, it’s time to buy; when investors are greedy, it’s time to sell.
Well, there’s a consistent fear surrounding Aurora Cannabis, suggesting that if the company doesn’t stop burning so much cash, it won’t be able to survive. That has weighed heavily on the stock price. Nonetheless, there could be a major reversal in the cards for the stock.
So, what does Aurora Cannabis have going for it?
The company is already performing better than expected. Its third-quarter 2020 revenues climbed 18% on a quarter-over-quarter basis, blowing away analyst expectations. And along with revenue performance being much better than expected, Aurora Cannabis is quickly reducing its cash burn.
In the third fiscal quarter of 2020, the company burned through about CA$154.5 million (around $115 million USD). That’s more than a CA$100 million decline in cash burn on a quarter-over-quarter basis from the CA$273 million reported in Q2. To achieve this, the company has drastically reduced the size of its workforce and seriously cut capital expenditures.
As revenue continues to grow and expenses continue to be cut, profitability seems to be just around the corner. Aurora Cannabis expects to turn a profit in the first fiscal quarter of 2021.
At the moment, Aurora Cannabis stock is beaten and battered. However, as revenue continues to grow, cash burn shrinks, and profitability becomes a priority, the stock is poised for a significant comeback that could lead to dramatic gains for savvy investors.
5. Aphria (NASDAQ: APHA)
Aphria may be the last on the list of top cannabis stocks, but it is far from the least. In fact, if you look at gross revenue from sales in Canada, the company is the country’s largest cannabis producer.
However, it’s also ridiculously undervalued for two reasons:
- Painful Acquisition. In 2018, Hindenburg Research and Quintessential Capital Management accused executives of Aphria of overpaying for the acquisition of LATAM Holdings. In fact, the short-selling market research firms suggested that management overpaid for the acquisition in order to line their own pockets with would-be investor dollars. The issue was such a big one that it led to the resignation of then-CEO Vic Neufeld.
- Earnings Snafu. Most recently, Aphria reported its fourth quarter and full year earnings in July. While revenue grew at a compelling rate, earnings went from positive to negative, with the company producing a loss of about 98.8 million Canadian dollars ($75 million). In the same quarter of 2019, the cannabis producer generated more than CA$15 million in profits. The swing to losses proved too much for many investors to take, leading to tremendous declines.
Nonetheless, there’s a strong argument that these issues have led to a massive undervaluation in the stock. After all, the company is the largest cannabis producer in Canada, and it’s got a lot going for it.
First off, the acquisition of LATAM was an issue. The company overpaid, management lined its pockets, and people lost their jobs. That issue is in the past, and the bad actors associated with it have been ejected from the company.
In terms of the second issue, net losses are never something investors want to see. However, when investing in cannabis stocks, net losses are the norm. Nonetheless, the report from Aphria wasn’t quite as bad as you may think.
The vast majority of the net loss was the result of a CA$64 million non-cash impairment charge associated with the company’s international assets as a result of the COVID-19 pandemic. The pandemic hurt quite a few companies, and Aphria was simply caught in that crossfire. The company also took a CA$27 million non-cash hit as the result of revaluation of its convertible debentures — or market value changes in debts that can be converted into stock.
At the same time, revenue in the quarter was up more than 5% on a sequential basis and up more than 18% year over year, even in the face of the COVID-19 pandemic. Moreover, Aphria is one of few companies in the cannabis market that has ever produced a profit.
The bottom line here is that, yes, Aphria has had some issues in the past, but those issues seem to be behind it. Moreover, it’s hard to hold the company accountable for COVID-19-related pains that, over time, should pass along with the pandemic.
When you break it down to fundamentals, Aphria is really the top cannabis producer in Canada by revenue, one of few companies in the sector that has ever achieved profitability, and a stock that’s trading at a ridiculously low valuation. All told, Aphria is a cannabis stock that’s hard to ignore.
Pro tip: If you’re going to add cannabis stocks to your portfolio, make sure you choose the best possible companies. Stock screeners can help you narrow down the choices to companies that meet your requirements. Learn more about our favorite stock screeners.
The cannabis sector is an exciting one. Led by speculation that nations like the United States will soon break down regulatory barriers in the industry, investing dollars are being poured into the space.
Before you throw your dollars in the ring, it’s important to do your research and consider the risks. Most companies in the cannabis space are not profitable. If they don’t have a strong enough balance sheet, this could mean that there will be transactions in the company’s near future that aren’t in the best interest of investors.
Furthermore, because much of the value in cannabis stocks is a predetermination banking on the idea that the United States will legalize the drug, regulatory headwinds could result in sector-wide losses.
However, if all goes well, the cannabis industry could soon be a booming one with the potential to create tens of billions of dollars in revenue for the companies that take part.
Do you invest in cannabis stocks? What are your favorite names in cannabis?
Disclaimer: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.