[Editor’s note: This story was previously published in March 2019. It has since been updated and republished.]
Often, when analysts or bloggers talk up the potential of marijuana stocks, the focus is on the consumer side of the industry. But some of the best stocks in the pot sector may be medical marijuana stocks.
Indeed, it’s on the medical side where growth is likely to be largest in the near term. Canada did legalize recreational marijuana last year, but investors promptly sold the news in response. Almost a year later, stocks like Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY) have recently touched 52-week lows.
U.S. legalization is likely to be a long slog. Attitudes are mixed in Europe — but even in legalized markets, black market (and untaxed) operators will be able to take share.
Meanwhile, approval of medical marijuana (in the U.S. and elsewhere) seems to be moving at a faster pace. In such a highly regulated market, black market and even smaller producers likely will be shut out. Quality and consistency will be key. Here, scale will matter. And those companies that win early have the best chance of becoming market leaders — and providing big gains for investors.
As always — and particularly in this space — investors need to mind the risks and size of their positions accordingly. But for investors who see medical marijuana stocks as the next big thing, these three are the best stocks to buy for investors enamored with weed.
Medical Marijuana Stocks to Buy: Charlotte’s Web (CWBHF)
Charlotte’s Web (OTCMKTS:CWBHF) has become one of the leading players in CBD oil (cannabidiol). And though Charlotte’s Web products are made from hemp — at least for now — instead of marijuana, the stock still looks like one of the best plays in the sector.
InvestorPlace’s Matt McCall named CWBHF (the stock also trades on the Canadian Securities Exchange under ticker CWEB) as his pick for our list of the best stocks for 2019. McCall’s case makes some sense. CBD oil sales are soaring, and Charlotte’s Web is a market leader. As McCall pointed out, the federal farm bill in the U.S. provided a catalyst by legalizing hemp.
So far this year, Charlotte’s Web stock has outperformed most recreational players, gaining 65% year-to-date. But a nearly 30% pullback from August highs creates another opportunity for an attractive entry point. Second-quarter earnings appear to have disappointed some investors, but revenue growth of 45% year-over-year and 15% quarter-over-quarter suggest the growth story remains intact.
There is a risk here from U.S. Food and Drug Administration regulation, but the agency seems unlikely to be a roadblock to Charlotte’s Web stock’s growth. With so many customers yet to try CBD oil — and so many existing users attached — market growth should be huge. And while CWBHF isn’t cheap from a valuation standpoint, its position as a market leader should allow it to grow into its valuation.
Like most major cannabis plays, shares of Cronos (NASDAQ:CRON) have declined of late. CRON stock has dropped by 50% since early March.
The declines may continue. CRON, like many of its peers, still isn’t cheap. And it still isn’t profitable. But there’s a lot to like here, particularly for investors more interested in the medical side of the industry than the consumer side.
But investors can’t ignore that Cronos is a medical marijuana stock as well. In fact, it’s that business that drove the majority of its revenue until recently. And it also has given the company a beachhead in multiple markets around the world, from its home market of Canada to Germany, Israel and Poland.
Cronos is looking to export medical marijuana via a joint venture in Israel. Its partnership with Gingko Bioworks aims to biologically manufacture expert cannabis strains. Those strains could be used for consumer products — but they might also have medical applications as the effect of cannabinoids is better understood.
The broader case for CRON stock is that the company isn’t looking to be a producer, where management sees prices and profits likely to be minimal as supply increases. If that strategy works, it will allow Cronos to profit from higher-margin derivative sales to consumers. But that high-level expertise will also make Cronos a potential leader on the medical side as well.
Aurora Cannabis (ACB)
Like CRON stock, Aurora Cannabis (NYSE:ACB) has a “falling knife” chart. ACB stock touched a seven-month low at the beginning of the month, and a rebound was undercut by a disappointing fiscal fourth-quarter report on Thursday.
Given that Aurora likely will need to raise capital relatively soon, patience is probably advised here.
But from a long-term standpoint, there’s an attractive case here. Aurora’s global reach is probably greater than that of any cannabis play at the moment. Medical sales drove just 30% of net cannabis revenue in Q4, but that figure should rise as efforts in Germany and Latin America drive growth.
Aurora will in part be a consumer play, as is the case for most marijuana stocks at this point. But its medical business is already large – and growing. In fact, Aurora already serves nearly 90,000 medical marijuana patients worldwide. As that figure rises, so will Aurora’s revenue. Once profitability follows — which should be next year — the long slide in ACB stock may finally reverse.
As of this writing, Vince Martin has no positions in any securities mentioned.