When a slew of cannabis firms reported quarterly earnings results, investors realized that markets beat down the sector. The sharp rally that ensued suggests that investors may continue holding or starting a new position in many marijuana stocks.
Not only are companies in the sector reporting smaller losses, but weak firms removed the excess supply that hurt prices. The stronger quarter revenue results should give marijuana stocks continued lift in the weeks ahead.
In the months leading up to the presidential election, markets may renew their bullishness in companies that sell marijuana. Voters may look at the debate of its legalization as a positive catalyst. Besides, the first phase of cannabis included its bungled launch in Canada and various other countries. The second phase is its legalization across much of the United States.
Here are the seven marijuana stocks that investors should watch as the presidential election approaches:
- Aurora Cannabis (NYSE:ACB)
- Aphria Inc. (NYSE:APHA)
- Canopy Growth (NYSE:CGC)
- Cronos Group (NASDAQ:CRON)
- Tilray (NASDAQ:TLRY)
- Curaleaf Holdings (OTCMKTS:CURLF)
- Hexo Corp (NYSE:HEXO)
Aurora Cannabis (ACB)
Aurora Cannabis soared by nearly 70% on May 14 and traded at levels not seen since after its 1:10 reverse split. The company posted revenue growing 34.8% to $75.5 million. Its adjusted EBITDA increased by CAD 29.39 million to negative CAD 50.85 million.
Aurora’s near-term revenue growth depends on opening triple the number of stores in Canada. Despite the shutdown in the country due to Covid-19, the company benefited from curbside pickup. Interim CEO Michael Singer also said that “we are pleased with today’s announcement that Ontario retail stores with outside entrances will be allowed to reopen fully as soon as next week.” Plus, the dynamic consumer environment and potential in medical cannabis may give ACB stock a sustained uptrend.
In the third quarter, Aurora grew its consolidated cash position to CAD 230 million, up from CAD 156 million last year. Its cash use declined by over CAD 118 million quarter-over-quarter. Now that it is relatively neutral on working capital with a modest increase in inventory, expect the company to post positive cash flow and profits this year.
Assume a drop in working capital and strong revenue growth over the next five years.
|Discount Rate||11% – 9%||10%|
|Perpetuity Growth Rate||4% – 8%||6%|
|Fair Value||$5.62 – $87.13||$15.75|
Data courtesy of finbox
With the above assumptions, ACB stock is worth $15.75.
Aphria Inc. (APHA)
Aphria posted revenue growth of 96% to CAD 144.24 million. It earned just two pennies a share. Still, the strong balance sheet and certifications (Aphria received its European Union Good Manufacturing Practices certification) are notable achievements in the quarter.
In the last quarter, it raised CAD 100 million in equity and held CAD 515 million. Though its EBITDA improved sequentially, its free cash flow burn deteriorated. An analyst asked why the company reported its widest gap between EBITDA and free cash burn on record. Management explained that its investments in working capital hurt its free cash flow. Initial first harvests from Aphria One will increase working capital needs. But as wholesale product sales grow, the company should see an uptick from the 10% margin.
Aphria said that it maintained a 77% market share on vapes in Ontario, Canada. The strong brand recognition suggests that safety concerns for vapes in general faded. After Aphria commanded three of the top five brands, it will build on that strength. By differentiating its portfolio, the company will target various consumer segments.
After trading $3 – $4 in the last few months, APHA stock is in a good position to re-visit last year’s levels. That depends on the company reporting continued sales momentum and smaller losses.
Canopy Growth (CGC)
Canopy Growth announced its 2.0 product rollout on May 12. This builds upon its Canadian recreational market and includes ready-to-drink cannabis-infused beverages, Houndstooth & Soda, and Houseplant Grapefruit and Deep Space.
Of marijuana stocks, Canopy is in a good position to lead in the nascent 2.0 market. Naturally, investors are cautious about the revenue prospects, given the strong revenue growth failed to eliminate quarterly earnings losses. This time, more store openings, a developed online sales channel, and lower inventories should lift its performance.
On May 1, Constellation Brands (NYSE:STZ) exercised its CAD 245 million warrants. Constellations vote of confidence speaks volumes. It also signals its commitment to its investment in Canopy. Still, investors should not forget that Constellation bought CGC stock at inflated prices. But with new management on board and CAD 2.3 billion of cash on hand, the company has the resources and leadership to build a profitable business.
Cronos Group (CRON)
Cronos Group announced alongside its first-quarter results that it completed the first dried flower shipment to Israel. It is closer to officially entering the Israeli medical cannabis market.
In early March, Cronos’ Natuera finished its first test export to the United States. Its extraction and processing facility for hemp strains planted in Mid-February continued in the quarter. This is a joint venture whose purpose is to access new markets and to expand the product. For example, the JV will develop hemp-derived CBD distillate and water-soluble hemp-derived CBD solutions.
Management said that it “believes our approach to building a world-class low-cost scalable supply chain with partners like NatuEra positions Cronos Group to develop new business and trade channels in geographies like Latin America and other markets globally.”
In the U.S., business declined due to store closings. But Cronos is confident that building consumer awareness of its products will reverse the drop. Management thinks that adding new products to the pipeline will increase consumer interest over time. In the last quarter, Covid-19 hurt its direct-to-consumer business. And as some of those retail partners shifted to online platforms, sales may recover in the third and fourth quarters.
Of all the marijuana stocks that investors should avoid, Tilray tops the list. The company’s revenue grew 126% to $52.1 million year-over-year. But losses only fell by 16% sequentially, to $35 million.
Given Tilray’s positioning in North America and the United States, investors should continue to watch this company. It has two GMP-certified cultivation facilities in Canada and Portugal. It participated in cannabis clinical trials in the United States. Through its joint venture with Anheuser-Busch InBev (NYSE:ABEV), the Fluent Beverage Company launched two CBD-infused beverages in Canada. Its Manitoba Harvest gets the hemp product platform from the U.S. and 19 other countries.
Tilray reduced its general and administrative expenses through a headcount reduction. It still needs to cuts its cost of goods sold (COGS) further before getting closer to profitability.
Curaleaf Holdings (CURLF)
Curaleaf is the largest cannabis provider in the United States. It owes its size to key shareholders that will commit up to $100 million more liquidity if needed. In the first quarter, the company reported revenue grew by an impressive 136.1% Y/Y to $75.46 million.
In the last quarter, Curaleaf reported a strong supply chain with minimal disruptions. After getting new licenses in limited license medical markets, such as in Utah and Pennsylvania, the company is a growth story in the United States. Its operations keep scaling, and operations are now self-supporting. Investors should monitor Curaleaf’s operating cash flow in the quarters ahead.
Business is healthy in the U.S. CEO Joe Lusardi said that “in Florida and New York we offer a delivery and we are definitely seeing increased demand for that service and so we are looking to add more vehicles to take advantage of the opportunity.” Still, most of Curaleaf’s sales are through its stores. Considering that its business is vertically integrated and the unique strength and investors will realize it has a moat.
Hexo is the smallest among the marijuana stocks by market capitalization. Its public offering, which hurts shareholders, did not help its stock price.
Hexo needs to continue disrupting the illicit cannabis market to develop its own business. Its Original Stash brand in Quebec proves that it can do that. The kilograms sold increased by 57% in Q2/2020. Chief Financial Officer Steve Burwash said that “due to the success of Original Stash, we are continuing to expand the distribution of it. It’s now listed in Quebec, Ontario, BC, Alberta, Nova Scotia, and Newfoundland.”
Hexo is attacking the black market through competitive pricing from the Original Stash line. So, if its cost per gram on the dried flower is as good or better, it will grow its market share and its revenue every quarter. Eventually, the business scale will decrease costs and improve margins. Plus, its joint venture in the CBD beverage market launching in Colorado will increase its addressable market.
As of this writing, the author did not hold a position in any of the aforementioned securities.