Cannabis stocks rallied hard into mid-October, as recreational marijuana use in Canada became legal. Afterwards, though, Tilray (NASDAQ:TLRY), Canopy Growth Corp (NYSE:CGC) and others were hit hard, just like the rest of the stock market. Now revitalized, Tilray stock and others are rallying. Is it time to give the industry some attention again?
Those who want exposure should surely look at the industry. There’s plenty of growth potential in it, particularly for long-term investors. There are many medicinal uses, and from a recreation standpoint, cannabis could become as common as having a beer or glass of wine.
It will take time to get there, yes, but acceptance continues to grow at a pretty quick pace. As that acceptance grows, so too does the potential for cannabis stocks to capitalize on it. So that begs the question, which cannabis stock is the best to buy? Is it Tilray stock?
Sizing Up Tilray Stock
The biggest problem with TLRY, and most cannabis stocks for that matter, is that the stock is really expensive. Let’s put it this way. Tilray stock currently commands a $13 billion market cap, yet is expected to generate $41 million in sales this year. In 2019, analysts expect more than a triple, up to $139 million.
Say they’re short by a lot though, and TLRY puts up $200 million in sales, a one-year quadruple. Then it still trades at 65 times 2019 sales! Where is the potential upside here?
That’s really my biggest issue with cannabis stocks — that the valuation is just so high. There are only a few ways to ease that valuation burden without lowering the stock price. That’s by either continued strong growth or strong operations.
The first one is simple. If TLRY grew 2020 revenues another 400%, then we’re talking about $800 million in sales and a stock that trades at 16 times revenue. More digestible for sure, but pretty unrealistic.
The other way to get there is by strong margins. MasterCard (NYSE:MA), Facebook (NASDAQ:FB), Nvidia (NASDAQ:NVDA) and others trade at very high price-to-sales ratios, but reasonable price-to-earnings ratios. That’s because they have big margins that filter a large percentage of those sales down to the bottom line.
So who do I like? I like the tie-up between Canopy Growth and Constellation Brands (NYSE:STZ). Constellation stock has been on fire over the years thanks the company’s strong alcohol business, and taking a near-40% stake in CGC speaks volumes of what Constellation’s well-respected management team thinks. A position in CGC would be for more aggressive investors. However, those who are more conservative but still want “some skin in the game,” they can consider STZ too.
Trading TLRY Stock
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As of roughly noon on Wednesday, investors still could have bought Tilray stock. That came after the midterm elections where some states are warming up to marijuana and others — Michigan — gave the greenlight for recreational use. That now brings the total to 10 states (plus Washington D.C.) that have made recreational use legal, and it’s only a matter of time before more join the list.
In any regard, TLRY stock had been slightly higher on Wednesday, but not significantly higher than the levels we recently suggested when looking at CGC, Tilray stock and Cronos Group (NASDAQ:CRON). That game plan can be found here.
Toward the end of the day, though, TLRY stock had racked up gains in excess of 30%, as shares scorch higher. Is there still time to get in?
With Wednesday’s power move, Tilray stock is now over the 21-day and 50-day moving averages, as well as potential downtrend support. If it can close above $140, it will be above its other possible downtrend line, if traders are going off closing prices rather than the highs.
Either way the action is bullish, although it’s hard to chase a stock over $130 when it was at $100 just earlier this week. If investors are bullish, they could use the 50-day at $120 as their stop-loss to limit the downside and look for a rally into the $160 to $180 area from here.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long NVDA.
