Marijuana stocks have been red-hot heading into the U.S. election. Former Vice President Joe Biden is performing well in the polls. A “blue wave” could open the door for decriminalization of recreational marijuana, potential rescheduling and other federal cannabis legislation.
A Biden victory could be best for U.S. multi-state operators. But Cantor Fitzgerald said this month that Canadian legal cannabis producers could also enjoy “collateral benefits” from their Southern neighbor’s marijuana legislation.
To be sure, 2020 has been another disappointing year for Canadian cannabis stocks. Investors hoping for a rebound after a difficult 2019 have instead suffered even more-negative price action. Canadian marijuana prices have continued to deflate, and so-called Cannabis 2.0 products have yet to pick up the slack.
In fact, the so-called “big four” Canadian legal cannabis producers are each down between 3% and a whopping 82% year-to-date.
They are as follows:
- Aurora Cannabis (NYSE:ACB)
- Canopy Growth Corp (NYSE:CGC)
- Cronos Group (NASDAQ:CRON)
- Tilray (NASDAQ:TLRY)
The election may very well make 2021 the year cannabis investors have been waiting for. However, there is still plenty of uncertainty in the cannabis market, particularly in Canada. I still believe the cannabis industry will ultimately produce some huge winners for investors in the long-term. So for investors looking to bet on cannabis by buying Canadian LPs, here’s a rundown of the big four Canadian marijuana stocks — ranked from best to worst.
When I ranked the big four Canadian marijuana back on April 22, I put Canopy first, followed by Cronos, Tilray and Aurora last. The chart below shows I’ve been four-for-four up to this point.
Canopy has been by far the best performer followed by Cronos then Tilray then Aurora. Since then, some things have changed, and I believe that chart will look a lot different six months from now.
Big 4 Marijuana Stocks: Canopy Growth Corp (CGC)
Canopy Growth is the only cannabis stock that I personally bought on the market downturn back in March. So of course it’s going to be my top pick out of the big four. CGC stock has been the best performer of the big four Canadian marijuana stocks in 2020. It’s also up 72.5% in the seven months since I bought the stock, so no complaints here.
There are several reasons why I like Canopy more than any other pot stock. First, it has the largest share of the Canadian recreational cannabis market. Second, it has the financial backing of minority investor and global alcohol giant Constellation Brands (NYSE:STZ). Balance sheets are one of the biggest problems in the cannabis space these days. Constellation has Canopy’s back.
But most importantly, Canopy has the biggest vested interest in U.S. federal cannabis legalization. Canopy has already agreed to a conditional buyout of U.S. MSO Acreage Holdings (OtherOTC:ACRHF). If the Washington ever legalizes pot, Canopy immediately has a massive first-mover advantage due to its Acreage acquisition.
Aurora Cannabis (ACB)
When I last ranked the Canadian cannabis stocks, I ranked Aurora Cannabis dead last. Despite the fact that ACB stock is down another 44% since then, I believe the outlook has significantly improved.
In September, Aurora announced a new CEO and a non-cash writedown of goodwill and intangible assets of between $1.6 billion CAD ($1.21 billion) and $1.8 billion CAD ($1.37 billion).
Cantor Fitzgerald analyst Pablo Zuanic says Aurora’s recreational marijuana business is not currently in a good place. But the company’s management team has the right plan moving forward.
“Management will increase focus on other premium and super premium flower lines, and expand other formats (pre-rolls, vapes, edibles),” Zuanic told clients.
I’ve repeatedly called ACB stock a lottery ticket pick. But expectations are so low at this point that the potential payoff on that ticket is higher than ever.
Cronos Group (CRON)
The more the cannabis bull case has shifted away from growth and toward balance sheets, the better Cronos Group has looked.
As a value investor at heart, I always feel more comfortable recommending stocks that are liquid and profitable. Cronos is profitable over the past four quarters. It also has plenty of liquidity and the financial backing of tobacco giant Altria (NYSE:MO).
Critics could point to Cronos being too defensive in investing in expanding its business. But given the financial troubles Aurora and other marijuana stocks have run into by overextending themselves, CRON stock investors are likely now thankful the company took a more conservative approach.
Morningstar analyst Kristoffer Inton is bullish on Cronos’ exposure to the U.S. cannabidiol market and other international cannabis markets.
“Cronos’ efforts to expand production internationally should offset its cost-disadvantaged Canadian production. We forecast roughly 20% average annual growth through 2030,” Inton told clients.
Once upon a time, Tilray’s ambitious international growth strategy made it among the hottest marijuana stocks. Today, its lack of profitability, lack of major financial backers and aggressive shareholder dilution makes it the most dangerous investment of all the big four Canadian cannabis stocks.
Last quarter, Tilray’s revenue growth dropped to just 10%, down from 126% in the previous quarter. Without a compelling growth narrative and a solid balance sheet, Tilray is at the mercy of a struggling Canadian cannabis market.
The longer the growth narrative takes to play out, the more TLRY stock holders will suffer.
“The company has yet to generate positive free cash flow and faces maturing notes in the medium term, which will likely require outside capital or refinancing,” Inton wrote.
Slowing growth, rising costs and ongoing cash burn apply further pressure to Tilray’s balance sheet. That being said, the stock could still ultimately prove to be a big winner if cannabis market conditions improve.
On the date of publication, Wayne Duggan held a long position in CGC.
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. He 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.