It’s been a good year for cannabis stocks. But with several of the largest, most popular cannabis stocks already up more than 70% year-to-date, the marijuana space is looking fairly expensive. Given the lofty valuations in the cannabis group, some investors are looking for under-the-radar ways to play the marijuana trend.
Bank of America recently initiated coverage of cannabis stocks. Their picks included popular cannabis plays Canopy Growth Corp. (NYSE: CGC) and Aurora Cannabis (NYSE: ACB). But Hexo and Supreme are couple of top picks that aren’t typically among the most popular pot stocks.
Cannabis Stocks To Buy: HEXO
Surprisingly, Bank of America analyst Christopher Carey named HEXO stock his top cannabis pick. Hexo is a cannabis company based in Quebec that has national distribution in Canada. It is also the preferred supplier of the province of Quebec.
Aurora and Canopy are the two big dogs in Canadian production. Canopy’s $16.2 billion market cap and Aurora’s $9.1 billion market cap reflect those positions. However, Hexo is aggressively pushing to move into the top five.
Hexo recently announced a buyout of Canada’s Newstrike Brands for $263 million, the largest merger between two Canadian cannabis producers in history. The merger will quadruple Hexo’s cultivation space from 579,000 square feet to more than 2.3 million square feet.
Given HEXO stock is already up more than 100% year-to-date, its far from cheap compared to a few months ago. However, for investors looking for a long-term play on the cannabis trend, Hexo’s $1.4 billion market cap leaves plenty of room for expansion.
Carey says Quebec is home to 25% of Canada’s legal-aged residents. He also says the company’s five-year contract with Quebec de-risks the HEXO stock outlook, making it the safest Canadian cannabis stock.
“It is compelling on valuation vs peers… and with fundamentals grounded by the most de-risked cannabis supply in Canada (off-take with Quebec), an innovation-forward organization and potential for additional value-add partnerships,” Carey says.
Even after HEXO stock doubled in early 2019, Carey has a C$14 price target for HEXO. That target suggests an nearly 50% additional upside from current levels.
Cannabis Stocks To Buy: Supreme Cannabis
Hexo caught many stock investors off guard as Bank of America’s top pick. However, investors looking for a true under-the-radar pick should consider Supreme Cannabis. Supreme is based in Ontario. It is focused primarily on the premium end of the cannabis market. As of 2019, the company operates mostly in the Canadian market. In the longer-term, it has plans to expand its business globally.
Supreme is not in the same league as the other cannabis stocks I mentioned in terms of the size of its operation. SPRWF stock has a market cap of under $500 million. In March, Supreme announced a 50% increase in its total 7ACRES production space, which is still only 180,000 square feet. The company said it plans to hit 50,000 kg of annual production capacity by mid-2019.
SPRWF stock is up 55% in 2019, but it has lagged its larger, high-flying peers. Carey says Supreme is selling in bulk to Canadian peers at around the same price peers are selling their product at retail. That’s a testament to the pricing power of Supreme’s product. Carey says Supreme’s wholesale business gives the company flexibility over the next couple of years while it builds its retail processing and packaging operations.
The potential downside to the wholesale business is that Supreme may be missing out on opportunity to build its brand among retail buyers. Supreme’s 7ACRES was named “Brand of the Year” at the 2018 Canadian Cannabis Awards. But if the majority of the product is being sold to peers rather than consumers, Supreme may be missing out on a brand-building opportunity in the fledgling Canadian market.
For cannabis stock investors looking for a high-risk/high-reward play, SPRWF stock may be the best opportunity out there.
Safest Way To Play Cannabis Stocks
It’s always exciting to find under-the-radar stocks to buy and feel like you have a unique play on an idea like cannabis investing. However, the safest and smartest bets are typically the ones that minimize risk and maximize diversification.
Investors like Warren Buffett who have been consistently successful over time tend to focus on companies that are best-of-breed and have leading market shares. In cannabis, those companies are Canopy and Aurora.
But an even safer approach to cannabis stocks is buying an ETF. The recently-launched AdvisorShares Pure Cannabis ETF (NYSE: YOLO) launched just this month and holds around 40 different stocks. No matter which companies emerge as the winners, the YOLO ETF should benefit.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.