Investors looking for marijuana stocks to buy have no shortage of options that are cheaper than they were a month ago, let alone a year ago. But caution is advised: in this sector, it’s an enormous risk to chase “cheap” stocks.
That said, this risk again popped up this week when Aurora Cannabis (NYSE:ACB) reported earnings. ACB already was down more than 90% from last year’s highs before the release, but soft guidance for the current quarter sent ACB stock plunging another 29%.
Overall, Aurora’s results highlight the continuing struggles for the sector. And those struggles are likely to lead to a shakeout in the industry. There still are too many producers with too much capacity. The black market in Canada has held up better than expected. Leverage is a concern for a number of companies, including Aurora, Hexo (NYSE:HEXO) and others.
Those factors don’t mean that there are no marijuana stocks to buy in the entire market. Rather, it means that investors should be prudent and focus on the strongest companies. After all, even the best operators will need time to work through the industry’s issues.
Investors should only own shares of those companies whose financial strength guarantees that time. That said, these are seven such companies:
- Canopy Growth (NYSE:CGC)
- Cronos (NASDAQ:CRON)
- Aphria (NASDAQ:APHA)
- GrowGeneration (NASDAQ:GRWG)
- Cresco Labs (OTCMKTS:CRLBF)
- Curaleaf Holdings (OTCMKTS:CURLF)
- Trulieve Cannabis (OTCMKTS:TCNNF)
So, with all of that in mind, let’s dive in.
Marijuana Stocks to Buy: Canopy Growth (CGC)
Canopy Growth remains the most valuable cannabis company in the world — but it’s much less valuable than it was eighteen months ago. CGC stock has fallen more than 70% from last year’s highs, and sits at a four-month low after dropping 9% last Wednesday in sympathy with Aurora’s earnings miss.
The pressure on the stock makes some sense. Again, there are real pressures on the sector. The Canadian market unquestionably has been a disappointment. However, the problem hasn’t been just sales, but margins. Significant overcapacity has led to a “race to the bottom” in pricing. As a result, Canopy posted an adjusted gross margin of just 7% in its most recent quarter. The company’s Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss of $92.2 million was some 83% of revenue.
But, looking forward, there is reason for some optimism. Canopy’s financial position remains strong. Thanks to the massive investment by Constellation Brands (NYSE:STZ,NYSE:STZ.B), the company still has $1.3 billion in cash, and just over $400 million in debt. At the same time, the company has established leading brands, built out its medical marijuana business, and expanded beyond Canada.
As a result, Canopy should be well-positioned to manage what is likely to be a shrinking industry. Cannabis companies already are falling by the wayside. More will follow, relieving some of the overcapacity issues.
Meanwhile, assets and brands will be available on the cheap. And new management (David Klein, formerly Constellation’s chief financial officer) should take a more sober approach and better manage the remaining cash.
Collectively, the Canopy story so far has disappointed — but it’s far from over.
It’s probably not time to add CRON stock to the list of marijuana stocks to buy. But we’re getting closer.
The case for CRON is somewhat similar to that of Canopy. Cronos, too, received a large cash infusion from an American company. In this case, the investor was tobacco giant Altria (NYSE:MO). Cronos actually has a higher net cash balance than Canopy, closing its second quarter with $1.2 billion in cash and zero debt.
The difference is that Cronos hasn’t built much of a business at all. That’s mostly by design: Cronos purposefully avoided building out significant production capacity. It instead is buying its supply and looking to create branded flower and so-called “Cannabis 2.0” products like vapes and edibles. It’s also invested heavily in research and development for fermentation processes as well.
As a result, Cronos’ fundamentals look dismal. In the second quarter, the company generated less than $10 million in sales. Adjusted operating loss was three times as high. And like Canopy, Cronos needs its industry to get healthy.
However, also like Canopy, Cronos has the cash to wait out industry problems — and to take advantage of struggling competitors. That’s not quite a bull case yet, but experienced investors can consider using the options market (as I have) to either get paid to wait or own CRON stock at a price below even Wednesday’s close just above $5.
Marijuana Stocks to Buy: Aphria (APHA)
At the moment, there may not be a better cannabis company in Canada than Aphria. Unlike so many peers, Aphria is nicely profitable on an EBITDA basis. Revenue continues to grow, climbing 129% in fiscal 2020 (ending May). The company is a player in Europe as well.
There’s simply a lot to like here, yet APHA stock doesn’t seem to get much respect. APHA has outperformed the sector, to be sure, but still has declined 15% year-to-date. Shares have faded recently to a two-month low.
Overall, the picture is slightly murkier looking forward. Aphria’s balance sheet is not quite pristine. Cash just shy of 500 million CAD is nearly offset by roughly 400 million CAD in borrowings. Bankruptcy risk seems minimal, but Aphria does lack the dry powder of its larger rivals.
Still, with a pullback below $5, APHA stock looks at least intriguing. Certainly, it should make any list of marijuana stocks to buy. And in a sector where execution generally has been abysmal, Aphria truly stands out.
Given the struggles among Canadian cannabis producers, investors looking for marijuana stocks to buy of course can look elsewhere. They can look outside Canada — and to companies that aren’t actually producing cannabis.
That said, GRWG stock fits on both counts. The U.S. retailer serves as a “picks-and-shovels” play on cannabis growth, as InvestorPlace contributor Luke Lango put it. The company operates retail locations nationwide that serve both commercial and individual growers. And with gardening as a whole seeing a general uptick in demand during the pandemic, there’s a non-cannabis tailwind as well.
Nonetheless, there are risks. GRWG stock isn’t cheap, and the stock recently was the target of a bearish report from Hindenburg Research, the same firm that’s correctly highlighted significant problems at electric truck manufacturer Nikola (NASDAQ:NKLA).
Still, the opportunity is large. The market is fragmented. GrowGeneration is a better play on cannabis specifically than a stock like Scotts Miracle-Gro (NYSE:SMG). And GrowGeneration’s balance sheet is in excellent shape. Thus, aggressive investors could see an attractive “buy the dip” case here.
Marijuana Stocks to Buy: Cresco Labs (CRLBF)
With Canadian producers scuffling, investors can turn to their U.S. counterparts. So-called MSOs (multi-state operators) aren’t listed on U.S. exchanges, owing to the continuing prohibition on marijuana production under federal law. That does add some risk, but some investors can buy the stocks directly on Canadian excahnges.
However, MSO stocks — including Cresco Labs — offer solid liquidity even though they’re traded over-the-counter. And there is a case for the best MSOs — again, including Cresco Labs.
Cresco in particular has a solid U.S. footprint, with a presence in six of the ten most populous states. That includes significant production capacity in Illinois and Pennsylvania — both among the most attractive legalized markets.
Moreover, Cresco is solidly profitable on an EBITDA basis. The stock isn’t necessarily cheap, but valuation looks attractive relative to recent growth. All told, there’s a nice case for Cresco stock — no matter where investors buy it.
Curaleaf Holdings (CURLF)
The case for Curaleaf stock is somewhat similar. Curaleaf, too, is a U.S. MSO. In fact, it’s larger than Cresco, with a market capitalization more than three times as high.
The geographic profile is somewhat different, however. Curaleaf’s core strength is in the Northeast, where it has leading market share in basically every state. That includes 25%-plus of the market in New York and 35%-plus in New Jersey.
The balance sheet is modestly riskier as well, as Curaleaf has a small amount of net debt. But the figure is almost immaterial in the context of a market cap that nears $4 billion.
Curaleaf stock admittedly hasn’t been a great investment so far. The stock actually trades only 5% above where it opened on the Toronto Stock Exchange in late 2018 — and well-below the initial public offering price. Of course, many Canadian operators have done much worse over the same stretch, and the lack of returns so far keeps valuation modest. It may be that CURLF stock has its best days ahead of it.
Marijuana Stocks to Buy: Trulieve (TCNNF)
Trulieve’s core market is Florida, where the company dominates the medical marijuana business. The company estimates that it dispenses about 50% of the medical marijuana in the state.
That state has proven to be a highly profitable market, but the question is how the company performs in the rest of the country. Trulieve has entered the Massachusetts, California and Connecticut markets via acquisition — but is facing entrenched competition in those states.
Still, if Trulieve can succeed, its stock should see significant upside. And thanks to debt offerings last year, the company has plenty of cash to invest in those new markets. With cash flow already positive, managing that debt shouldn’t a problem. Overall, Trulieve clearly has an opportunity and the company just needs to execute.
On the date of publication, Vince Martin held a long position in Cronos options.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.