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Marijuana Stocks: Two to Consider, Two to Avoid

Canada has legalized marijuana consumption on a national level

By Ian Bezek, InvestorPlace Contributor

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Marijuana Stocks: Two to Consider, Two to Avoid

Source: MarihuanayMedicina via Flickr

The marijuana legalization movement is picking up speed. There have been various wins here and there, such as in Colorado and Washington. Uruguay became the first nation in the Americas to permit recreational marijuana usage in 2014. It further legalized marijuana pharmacies in 2017.

However, until now, no major country had legalized consumption on a national level. Marijuana stocks were waiting for a bigger market to come online.

That’s happened now. Canada has opened up marijuana to public usage. Its Senate approved legislation earlier this week which removes the last obstacle to legalized pot. It’s expected that Canadians will be able to consume legal weed as early as October.

Not surprisingly, investors are rushing to get in on the ground floor of this vast new market. Here are some marijuana stocks that could deliver big gains, and others that come with significantly more risk.

Marijuana Stocks to Consider: Constellation Brands

You may know Constellation Brands (NYSE:STZ) as a leading beer and wine company. And that’s true. But Constellation has big plans for the marijuana space in the future. The opening move for that came with Constellation buying a 9.9% stake in Canopy Growth (NYSE:CGC) this past October.

This was an obvious and attractive way to get exposure to the marijuana equity space at an attractive price. Canopy stock was at around $10 back then and is now at around $34.

And there is a bigger strategic plan at work as well. Constellation wants to sell marijuana-infused products itself. The company has said that it’s too early to tell whether marijuana legislation will help, hurt or be neutral for alcohol companies. As a result, it is hedging its bets by selling pot-infused beverages of its own. As the company put it earlier this year:

“Our goal with this organization [Canopy] is to work collaboratively to both understand the cannabis business but also develop unique cannabis-based beverages that will be available around the world as legalities prove those to be an option.”

A Canopy spokesperson suggested that marijuana-infused products, such as beverages, won’t be legal in Canada until next year. However, she went on to add: “That said, we are already preparing for the opportunity to brand and market these products, once federal regulations permit.”

In the meantime, Constellation has its leading portfolio of beer and wines, including brands such as Corona. With STZ stock at 21x forward earnings, this is a reasonable way to get a shot at the marijuana market without taking massive downside risk.

Marijuana Stocks to Avoid: Canopy Growth

Let’s turn from Canopy’s 10% stock owner, Constellation Brands, to Canopy itself. Unfortunately for average investors, Constellation got in at a way better price than we could now.

Last fall, Constellation paid C$245 million (US$184 million) for 9.9% of Canopy Growth. CGC stock is now selling with a market cap of greater than $5.7 billion. That values Constellation’s share at $570 million, or triple their investment in under a year.

As stated above, that was a savvy move on Constellation’s part. But the price of CGC stock today bakes in some outlandish optimism. CGC stock now sells at more than 100x sales. The company sold only $55 million in product last year, but the market values that at more than $5.7 billion.

A 100x price/sales ratio is nearly unheard of in the history of publicly traded stocks. The general rule is to avoid stocks trading above 10x price/sales — maybe, just maybe you can get away with paying 20x for something growing at an incredible rate. But 100x sales is a bridge too far.

Sure, going forward, Canopy will be able to grow its revenues much more quickly. But a flood of competition will hit markets, lowering margins as well. And it’s not like Canopy was earning huge profits on its minimal revenue stream either. CGC stock is a story-driven mania at this point.

Once people double-check the math, they’ll see that Canopy won’t be able to create $5.7 billion in value anytime soon. A holding stake via a company like Constellation is a much safer way to invest, since it is a diversified business, and plans to roll out its own marijuana-infused products. And you don’t have to pay an arm and a leg for STZ stock like you do with Canopy.

Marijuana Stocks to Consider: Alcanna

Alcanna (OTCMKTS:LQSIF) is another marijuana stock worth considering today. Alcanna was formerly known as Liquor Stores N.A. Ltd. and ran, not surprisingly, liquor stores in Canada and the United States. It has realigned its business model in recent months, however. It’s divesting some of the U.S.-based liquor stores to become a more Canada-focused operation.

And, most importantly, Alcanna will now become a marijuana retailer. Alcanna currently operates about 175 liquor stores in Alberta, along with a smaller number in British Columbia. That gives it a nice position in the sales of already heavily regulated goods. That makes it a natural player for building out a marijuana retail business.

The company also earned a sizable endorsement. Aurora Cannabis (OTCMKTS:ACBFF) bought 25% of Alcanna earlier this year for a more than $100-million investment. That gives Alcanna plenty of capital to build out its retail business and a close partnership with one of Canada’s big emerging producers.

There is plenty of risk here. Alcanna had a mixed track record as a pure-play liquor store operator. Adding marijuana to the mix doesn’t guarantee success. But the valuation is reasonable, and Alcanna offers an interesting 4% dividend yield while waiting for the growth story to potentially play out.

Marijuana Stocks to Avoid: Neptune Technologies

Neptune Technologies (NASDAQ:NEPT) is a long-running story stock. Almost a decade ago, the company hyped up its krill oil, extracted from a type of small Arctic crustacean.

Neptune positioned krill oil as a superior alternative to fish oil, which companies such as Amarin (NASDAQ:AMRN) sell. Amarin obtained FDA approval for Vascepa, its fish oil-based pharmaceutical drug, for cardiovascular benefits.

Neptune, by contrast, never achieved similar success. While NEPT stock gyrated widely, krill oil never took off. A fatal factory explosion in 2012 set the company back farther. Last year, Neptune finally threw in the towel on krill oil, selling off its manufacturing business for $34 million. NEPT stock slumped to multiyear lows below $1/share following the news.

However, Neptune wasn’t done. It decided to pivot, not surprisingly, to marijuana. Instead of getting an extract from tiny marine life, the new plan is to extract oil from cannabis. It also has suggested that it may combine cannabis with omega-3 oils, though it’s unclear what potential synergies the two would have in combination.

And NEPT stock flew earlier this week following news that it will partner with Canopy Growth to make marijuana extracts in a multiyear deal. The press release provided little in the way of tangible details. Regardless, it was enough to shoot NEPT stock up to $4, giving it a $350-million market cap.

Could Neptune’s cannabis extracts become a big market? Sure. Is it worth a $350-million market cap for a company with a checkered past and no clear pathway to profitability in the future? Probably not.

At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.


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Article printed from InvestorPlace Media, https://investorplace.com/2018/06/marijuana-stocks-two-to-consider-two-to-avoid/.

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