Investors buying marijuana stocks are rightfully excited about the long-term outlook for the industry. Unfortunately market leaders Canopy Growth (NYSE:CGC) stock and Aurora Cannabis (NYSE:ACB) stock are both down more than 40% in the past six months.
The unbridled enthusiasm that initially greeted many U.S.-listed marijuana stocks has died down. It has been replaced with a more pragmatic market view of the long journey the cannabis industry has ahead. It will take many years of heavy investments and political battles before the industry hits its full stride. In the meantime, investors will be looking for the best potential value in the space.
According to Stansberry Research analyst Tom Carroll, the three best marijuana stocks to buy aren’t necessarily household names.
Why Not Aurora Stock?
I have said CGC stock is relatively attractive compared to where it was a few months ago. But the most popular investment among the Millennial users of the Robinhood app is ACB stock.
ACB is an early leader in Canadian cannabis market share. I have nothing against including Aurora in a cannabis basket of investments. However, Bank of America analyst Christopher Carey says Aurora’s stretched balance sheet creates limited financial flexibility and risk for investors.
“We also believe it needs to shore up its balance sheet, with a capital raise needed as early as CQ120 just to fund operations,” Carey says.
ACB stock already benefited from the early rush of capital into U.S.-listed marijuana stocks and all of the bullish headlines that surrounded it. Now, the market is readjusting its valuation to a more appropriate level. At this point, the cannabis bull thesis is about which marijuana stocks can grow into their valuations fastest without diluting shareholders.
ACB stock reported a revenue miss in the fiscal fourth quarter. Management noted slower Canadian retail store growth as a headwind for the company in the near-term. As growth slows, Aurora’s cash burn becomes more of a problem.
Alternative Marijuana Stocks to Buy
Cannabis investors are well aware of CGC stock, Organigram (NASDAQ:OGI), and the other top U.S.-listed marijuana plays. But Stansberry Research analyst Tom Carroll says the marijuana stocks with the best risk-reward profiles are flying under-the-radar.
Carroll says Charlotte’s Web Holdings (OTC:CWBHF) stock is a “must-own” for any cannabis investor. “It has strong brand recognition and great intellectual property on its seeds and strains,” Carroll says.
In addition, he says Charlotte’s Web is the Canadian market leader in CBD products. It also has less regulatory uncertainty than other top cannabis stocks.
Carroll’s next top cannabis pick is Green Thumb Industries (OTC:GTBIF) stock. Carroll says Green Thumb has been very mindful of its capital usage in making targeted acquisitions. Green Thumb also has a strong portfolio of intellectual property and some impressive organic license award wins.
Finally, Carroll likes Trulieve (OTC:TCNNF). He says Trulieve dominates the Florida region in the U.S., which has a robust and growing cannabis market. Trulieve is one of the few U.S. cannabis operators turning an impressive profit. The company has even started to expand its reach into additional states. Carroll says Trulieve is one of the most likely buyout candidates among U.S. cannabis stocks as well.
Best Approach to Cannabis Stocks
As I say every time I write about cannabis, the early stage of the market makes any investment extremely high-risk. Just because an investment is high-risk doesn’t mean investors should stay away. But it does mean investors should at least consider taking precautions.
In my opinion, CGC stock and ACB stock are high-risk, and they are the market leaders. CWBHF stock, GTBIF stock and TCNNF stock are all extremely high-risk. They are all much smaller players with much fewer resources. They all have uncertain regulatory outlooks. But Carroll makes solid arguments about why each stock is a buy.
I would recommend cannabis investors take a diversified approach and invest in at least four or five different stocks. I would include CGC stock and even ACB stock in that basket. ACB stock may not be the most attractive at today’s prices, but it is still a market leader in cannabis and is well-positioned to stay that way. CWBHF stock, GTBIF stock and TCNNF stock can also be included in that portfolio. But I would recommend allocating no more than 20% of your total cannabis investment to these smaller, more speculative plays.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
