This year has been a disappointing year for investors across the board. However, it has been especially disappointing for investors of marijuana stocks. After a horrible 2019, cannabis investors were hoping stocks would bounce back in 2020 as Canada rolls out its Cannabis 2.0 legalization of edibles, vapes, infused beverages and other products.
Instead, the novel coronavirus outbreak has cannabis customers stuck at home and retail stores closed indefinitely. The good news for marijuana stocks is that there is plenty of evidence that the crisis has boosted cannabis demand. However, the problem is that the coronavirus has also created an uncertain path forward, especially for companies with shaky balance sheets and aggressive cash burn.
That said, the so-called “big four” Canadian legal cannabis producers are each down between 24% and 70% year-to-date. They are as follows:
The cannabis space will likely continue to be difficult to navigate in the near-term. However, I’m one of many cannabis bulls that believes there will be some huge cannabis winners in the long term. So, for investors looking to buy the dip in cannabis, here’s a rundown of the big four Canadian marijuana stocks — ranked from best to worst.
Big 4 Marijuana Stocks: Canopy Growth Corp (CGC)
As I recently wrote, CGC stock is the only cannabis stock that I have personally bought during the current downturn. It’s also the only one that I own, period. I actually had no intention of buying any cannabis stocks. However, when I saw Canopy trading under $12 per share, it simply seemed too cheap to ignore.
In a nutshell, Canopy is the largest Canadian cannabis producer — both by market share and by market capitalization. It has one of the best balance sheets in the industry, along with a deep-pocketed minority investor in international alcohol giant Constellation Brands (NYSE:STZ). Last year, Canopy gave its founder and CEO the boot and replaced him with the former Constellation CFO. And as I’ve said before, I think there’s a good chance Constellation replaced Canopy’s CEO in preparation for a potential full buyout at some point.
In the meantime, Canopy has a conditional buyout in place to take over one of the largest multi-state operators in the U.S., Acreage Holdings (OTC:ACRGF). So if the U.S. legalizes marijuana, Canopy has an immediate first-mover advantage.
Therefore, if you are bullish on marijuana stocks, you need to own CGC stock. It’s certainly not risk-free, but it’s the safest bet in the Canadian cannabis space these days.
A year ago, the cannabis bull case was all about rapid growth. Today, however, the focus is on playing defense and having a healthy balance sheet.
I’m a value investor at heart, and so I always prefer companies that are focusing on profitability and liquidity rather than growth at all costs. The good news for CRON stock investors is that the company has one of the healthiest balance sheets in the industry. The bad news, however, is that it hasn’t really made much progress in expanding its business or advancing its strategy.
Moreover, Bank of America analyst Christopher Carey describes Cronos’ problem as “strategy paralysis.”
“We appreciate CRON has not intended to be in a ‘revenue race,’ which has likely shielded it from pitfalls faced by peers,” Carey says.
Unfortunately, while it hasn’t overextended itself financially, it also doesn’t seem to be making much progress on any fronts.
“We still see a path for Cronos to emerge from the early stages of this new sector w/ leadership, and portfolio optionality ex-Canada may be a part of that, but right now we prefer companies with tangible (and trackable) businesses,” Carey says.
In other words, most cannabis companies have been too offensive while Cronos has been too defensive.
Tilray stock is in trouble. The stock is down nearly 61% in 2020, and more than 86% in the past year. To me, Canopy and Cronos are in their own class of solid companies dealing with a rough patch. Meanwhile, Tilray and Aurora are in another category of growth stocks with no growth.
On March 31, Tilray unlocked 11 million shares of Class 2 common stock held by former Privateer Holdings investors. At one time, the fund held 77% of Cronos’ outstanding shares.
In other words, Tilray has released 11 million of Privateer’s 75 million shares. There are still 64 million left to go. In the meantime, Cronos has delivered inconsistent financial results. At the same time, its cash burn has been very high considering its tight balance sheet. On March 13, Tilray raised $90 million in cash and diluted its shareholders by a staggering 37%.
“While I understand the need to raise funds, I am surprised Tilray management would pretty much choose the worst of times to price the offering,” Cantor Fitzgerald analyst Pablo Zuanic said.
To me, that questionable decision speaks to the desperate situation Tilray finds itself in today. At this point, Tilray’s future has more to do with accounting and finance than it does to do with cannabis. Overall, I’d say stay away unless you are extremely risk averse.
Aurora Cannabis (ACB)
Aurora has been the worst-performing of the big four marijuana stocks It is down 67% in 2020, and 92% overall in the past year. Like Tilray, Aurora just announced a new $350 million equity facility out of sheer desperation. To maintain its listing on the NYSE, Aurora also announced a 12-to-1 reverse stock split.
Prior to the new capital raise, Aurora had $205 million in cash as of the end of March. It burned $174 million in cash in the most recent quarter. At this point, Aurora must demonstrate significant earnings upside and improvements in cash burn over the next two quarters. If not, the stock is likely headed to $0.
Additionally, Aurora stock is looking increasingly like the type of company that goes under during an economic downturn. I’ve called the stock a lottery ticket — and like a lottery ticket, it’s probably a loser. But if the company can figure out how to turn things around, investors could still hit the jackpot.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long CGC stock.