Marijuana stocks represent potentially lucrative investment opportunities. But the rewards come at a hefty price due to uncertainty on the developing competitive and regulatory backdrop. As Dan Ahrens, manager of a cannabis ETF, told CNN recently, buying cannabis stocks now is like “investing in alcohol post-Prohibition.”

One way forward is to follow advice from top Wall Street analysts. And that brings us to Bank of America’s Christopher Carey. The analyst covers a number of the most interesting cannabis stocks and spies several compelling investing opportunities.

With that in mind, here are three stocks the analyst is recommending, and one cannabis stock that he says is better to avoid. Let’s dive in.

Hexo Corp (HEXO)

Hexo Corp (NYSE:HEXO) is the No. 1 cannabis stock according to Carey. Although the Canadian cannabis producer was relatively under-the-radar, Hexo hit the headlines last August. That’s when Molson Coors Brewing (NYSE:TAP) and Hexo announced a joint venture focusing on cannabis-infused beverages in Canada. If all goes well with regulations from Health Canada, these drinks could hit the shelves as early as this October.

The analyst sets out his bullish reasoning here: “Hexo is our Top Pick in cannabis, screening compelling in our valuation framework vs peers (EV/sales and DCF), 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 (beyond that already developed with Molson Canada).” The analyst has just reiterated his buy rating on the stock with a $10 (indicating a healthy 45% upside potential).

The adult-use cannabis brand also receives the thumbs up from top-rated Oppenheimer analyst Rupesh Parikh. He has just spent time with management of HEXO, including co-founder and CEO Sebastien St-Louis. Most encouragingly, Hexo management continues to feel comfortable delivering on FY20 revenue guidance of $400 million, with potential upside from U.S. expansion or adding a new strategic partner.

At the same time, the analyst is also impressed by the company’s growing pipeline of innovative products and patent portfolio. “Although specifics are limited, we overall walked away increasingly confident in the pipeline of innovation to support future product launches catering to different product experiences such as sleep, focus, and sport on the CBD side and sex and fun on THC side.” What’s more, management is making the right decision to aggressively invest additional resources on the R&D side and expects to have 100 scientists, up from approximately 20 today.

Net-net: “We believe Hexo remains well positioned to at least capture its fair share of the Canadian market, and we overall walked away increasingly confident in the company’s strategy in a dynamic regulatory and competitive backdrop” Parikh tells investors. Interested in Hexo stock? Get a free HEXO Stock Research Report.

Canopy Growth Corp (CGC)

Widely accepted as the global leader of cannabis stocks, Canopy Growth Corp (NYSE:CGC) is set to maintain this premium position for a long time to come. For Carey, Canopy’s 6 million square feet of production capacity combined with the $4 billion Constellation Brands Inc (NYSE:STZ) partnership perfectly position the stock as a long-term market leader. This should enable the company to expand into products higher on the value chain.

And now the company has just made a very savvy decision by snapping up Acreage Holdings (OTCMKTS:ACRGF). Alliance Global Partners analyst Aaron Grey sees this as a “critical game changer”. The $3.4 billion deal opens up the world’s largest cannabis market in the U.S. to CGC, subject to federal legalization occurring within the next 7.5 years.

“We believe Canopy’s acquisition price will end up a bargain,” writes the analyst, adding that “While current market share is primarily indicative of production capabilities, we view Canopy’s R&D behind novel form factors as well as branding through a combination of products and retail, as allowing the company to maintain its market leadership.”

If we look at only ratings from top-performing analysts, CGC scores a very bullish “Strong Buy” consensus. That’s with four back-to-back buy ratings in the last three months. Meanwhile, the $60 average analyst price target indicates upside potential of 39%. Get the CGC Stock Research Report.

Aurora Cannabis (ACB)

Last but not least, Bank of America is also coming down in favor of Aurora Cannabis Inc (NYSE:ACB). Unlike many other cannabis companies, Aurora is operating on a global scale, and Carey also notes that the company still lacks a major partnership (unlike CGC for example). Should such a partnership be announced going forward this could be a major catalyst for the stock says Carey. He has a buy rating on the stock with an $11 price target (30% upside potential).

However, the analyst did express some reservations about Aurora’s current strategy. Following the company’s mixed earnings report, Carey wondered whether Aurora should be expanding from its current strategy of vapes and edibles and into the “next frontier”, i.e., cannabis-focused beverages.

“We see the strategy as reasonable; however, with so many companies also focused on these areas, and very few with the scale or capabilities to build advantages in untapped areas like beverages (with the exception of Canopy and Hexo), we wonder if Aurora could be ‘missing the boat’ on an area which could prove large as newer consumers wanting less pervasive, socially accepted product forms demand both psychoactive (THC-infused) and CBD beverages,” Carey told investors on May 16.

According to Zenith Global, canna-beverages should become a $1.4 billion market by 2023 — a very rapid explosion from just $89 million in 2018. Like CGC, Aurora also sports a “Strong Buy” Street consensus. Out of eight analysts covering the stock, six rate ACB a buy. Get the ACB Stock Research Report.

Cronos Group (CRON)

Last year, Cronos (NASDAQ:CRON) shares exploded by 154% thanks to a $1.89 billion investment from tobacco giant Altria Group (NYSE:MO). And this is exactly the reason that Christopher Carey believes this is a stock to avoid. According to the analyst, this impressive rally means that the company’s strong balance sheet is now more than accounted for by the current valuation. Indeed, Carey has a sell rating on CRON with a $13 price target (12% downside potential).

Interestingly, Cronos also receives a ‘Hold’ consensus from analysts. Five-star GMP FirstEnergy analyst Martin Landry gave this cautious analysis: “Cronos is testing investor patience with a slow production ramp-up and bottlenecks for processing and packaging. While Cronos’ shares have declined significantly from their 52-week high, we see limited near-term catalysts and investors should await a better entry point,” says Landry. He has a Hold rating on CRON.

However, he anticipates that production issues will be resolved before the summer, which should result in a stronger 2H19. Note that this is one of the Top 20 analysts tracked by TipRanks out of over 5,100 analysts for his stock picking ability. Get the CRON Stock Research Report.

TipRanks.com offers exclusive insights for investors by focusing on the moves of experts: Analysts, Insiders, Bloggers, Hedge Fund Managers and more. See what the experts are saying about your stocks now at TipRanks.com. As of this writing, Harriet Lefton did not hold a position in any of the aforementioned securities.