[Editor’s note: “4 Marijuana Stocks to Buy for the Big 2020 Rebound” is regularly updated to include the most relevant information available.]
Coming into 2020, the bull thesis on marijuana stocks looked pretty compelling. Cannabis demand trends in Canada were set to improve on the back of more aggressive retail store openings and new product launches. Supply trends were also set to improve as companies reduced production expansion. Revenue and profits — which were slammed in 2019 — were consequently positioned to move higher, creating an environment overgrowing with pot stocks to buy. That’s why, though mid-January, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) was up nearly 10% year-to-date.
Then, the coronavirus pandemic hit. The global economy came to a screeching halt. Stocks everywhere fell off a cliff. Marijuana stocks especially, because these companies are, for the most part, heavily indebted, cash poor and richly valued.
But just as quickly as the pandemic hit, the rout is fading. The economy is gradually normalizing. And stocks — particularly marijuana stocks — are rebounding with vigor. The ETFMG Alternative Harvest ETF is up more than 40% from its March lows.
I’d stick with this big rally in pot stocks. It’s only going to heat up in the second-half of 2020, as the aforementioned bull thesis comes back into focus. Revenue trends will improve on the back of more store openings and new products. Margin trends will improve thanks to curbed production and cost-cutting measures. Profit trends will materially improve alongside higher revenues and margins.
And pots stocks will soar.
With that in mind, some of the best marijuana stocks to buy for a second-half 2020 rebound are:
Marijuana Stocks to Buy for the Rebound: Canopy Growth (CGC)
The cannabis market’s biggest and most important company, Canopy Growth, looks ripe for a big second-half rebound for three big reasons.
First, the company has the cash to withstand a near-term demand impact from the coronavirus. With $1.6 billion in cash and investments, two to three months of sluggish demand will simply be absorbed by the balance sheet.
Second, Canopy reported numbers in mid-February which imply that this company had a ton of momentum coming into this crisis. That is, in the third quarter, Canopy: 1) reversed declining volume and revenue trends, 2) reported gross margin expansion, and 3) reported a narrower adjusted loss versus the previous quarter.
Third, this robust momentum should come back once the virus fades. Canada will proceed with more aggressive retail store openings. The cannabis supply glut in Canada will be reduced thanks to production cuts and a sudden surge in “panic weed buying”. New products will supercharge demand, with Canopy recently shipping new cannabis beverages and chocolate bars. Cost cutting and focused investment initiatives at Canopy will lead to better margins.
Net net, the company will report strong numbers in the back-half of 2020. Those strong numbers have the potential to converge on what is a significantly beaten-up CGC stock price, and spark a rip-your-face-off type rally in the stock.
Marijuana Stocks: Cronos (CRON)
Outside of Canopy, the next best marijuana stock to buy for a second-half rebound is Cronos.
The second-half bull thesis on Cronos boils down to two things.
First, the company’s cash-fortified balance sheet ($1.3 billion in cash and investments) gives them the resources to withstand a near-term demand impact from Covid-19. Insolvency is not a huge risk for this company today, or anytime soon.
Second, that huge balance gives the company ample firepower to invest in strategic growth opportunities once the virus fades. This firepower will enable Cronos to capitalize on rebounding Canadian cannabis demand in the second-half of 2020, paving the path for big growth over the next few quarters.
All in all, then, Cronos will weather the coronavirus storm better than other cannabis producers, and has ample firepower to recharge growth in the second half of 2020.
This reality isn’t reflected in CRON stock, which is down 25% year-to-date. As such, present weakness looks like an opportunity.
Shares of cannabis producer Aphria have struggled significantly in 2020, mostly because the company reported second quarter numbers in January that missed across the board.
But, the company did manage to report much better numbers in mid-April. Those much better numbers have breathed life back into the stock. Still, year-to-date, APHA stock is down more than 30%.
Aphria stock will continue to climb its way back over the next few quarters, for three big reasons.
First, the Canadian cannabis market will rebound in the back-half of 2020, on the back of more store openings, new products, and a reduced supply glut.
Second, Aphria has strong momentum heading into that rebound. Revenue growth is accelerating. Volume growth is accelerating. Gross margins are expanding. Adjusted profits are rising.
Third, Aphria has $345 million in cash and investments to help weather this near-term coronavirus storm, and come out the other side ready to grow rapidly.
Net net, the current recovery in APHA stock will likely persist into the second half of the year.
Last, but not least, on this list of marijuana stocks to buy once coronavirus headwinds pass is Aurora.
Aurora has long been the second-biggest player in the Canadian cannabis market, coming in right behind Canopy in terms of sales, volume, and production capacity. But investors have increasingly expressed concerns over the company’s balance sheet and liquidity, as Aurora features one of the worst balance sheets in the cannabis sector and has a major cash burn problem.
Management is trying to fix these problems. The company is going from “spend at all costs” mode in 2019, to “save cash at all costs” mode in 2020. Changes coming in 2020 include a new C-Suite, a ton of layoffs, reduced production capacity expansion, balance sheet restructuring, and much more.
In sum, these changes are actually good news. They will lead to lower operating and capital expenses. On top of rebounding demand trends, these lower expenses should translate into improved profitability and healthier cash flows.
Aurora just reported super strong third quarter numbers which imply that such improvements are already materializing. In the third quarter, Aurora sold 12,729 kilograms of cannabis, up 34% sequentially. Revenues rose 35% quarter-over-quarter. Gross margins stabilized in the 50%-plus range. Adjusted EBITDA loss narrowed from $80 million to $50 million, and loss margin improved by more than 76 points.
Management expects all of these favorable trends to persist for the foreseeable future. If they do — and I expect they will — then ACB stock will fly higher.
Sure, it’s already up a whopping 200% over the past few trading days. But my numbers suggest that this is just the beginning of a much bigger and longer rally for ACB stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long CGC.