Since March 2019, marijuana stocks have been fallen angels. The initial sector exuberance was replaced by concerns related to growth and sustained cash burn. In addition, regulatory headwinds are high for the sector and that also supported the massive sell-off in cannabis stocks.
However, in the last few quarters, cannabis companies have been taking corrective action. Focus has shifted from pursuing aggressive growth to cash conservation and consolidation. At the same time, companies have pursued clinical research to accelerate long-term growth in the medicinal cannabis sector.
Amidst the challenges, the long-term outlook for marijuana stocks is bright. The global cannabis market is likely to be worth $73.6 billion by fiscal year 2027.
With hopes of U.S. regulatory changes related to cannabis legalization, it’s a good time to consider exposure to some marijuana stocks. In addition, as companies reduce cash burn and potentially turn cash flow positive, some cannabis stocks will trend higher. Here are four marijuana stocks that a making a comeback and worth considering at current levels.
- Aphria (NASDAQ:APHA)
- Canopy Growth Corporation (NYSE:CGC)
- Aurora Cannabis (NYSE:ACB)
- Cronos Group (NASDAQ:CRON)
Marijuana Stocks: Aphria (APHA)
APHA stock is my top pick among cannabis stocks making a comeback. Even when the sector was depressed, APHA stock was relatively resilient. In the last six months, the stock has surged by 82%. I believe that there is more juice in the rally in the medium to long term.
One reason to like Aphria is the fact that the company has been delivering positive EBITDA. The first quarter of 2021 was the sixth consecutive quarter of positive EBITDA. Most cannabis companies have struggled to be positive at EBITDA level.
Further, for the company’s fiscal Q1 2021, the company reported net cannabis revenue of $62.5 million, which was higher by 103% on a year-on-year basis. Therefore, the core business has been delivering strong growth. Another positive development was the company’s first certified European Union Good Manufacturing Practices shipment of dried flower. The company is gradually positioning itself as a key player in the recreational and medicinal cannabis segment.
Last month, Aphria acquired Sweetwater Brewing Company. This is an important development as it gives the company an entry into the United States. Aphria intends to leverage on Sweetwater’s existing infrastructure to accelerate its cannabis division growth. Once there is federal legalization of cannabis, the company will be positioned for strong growth.
Bloomberg is reporting a potential merger of Aphria and Tilray (NASDAQ:TLRY). The merger will create the largest entity in Canada and is likely to be positive from the perspective of cost synergies.
Overall, APHA stock is worth holding for investors bullish on the future of the cannabis industry. I would maintain a positive outlook even for the merged entity.
Canopy Growth Corporation (CGC)
CGC stock has also delivered a strong comeback in the recent past with an upside of 53% in the last six months. It’s a stock worth keeping in the radar and accumulating on corrections.
For its fiscal Q2 2021 quarter, the company reported 77% growth in revenue to $135.3 million. Importantly, cash burn declined to $190.4 million as compared to $442.1 million in Q2 2020. If the company can deliver positive adjusted EBITDA and cash flows in the coming quarters, the CGC stock is likely to surge.
In 2019, the company estimates that less than 30% of recreational cannabis sold in Canada was through the legal route. With increasing store presence, it’s expected that 85% of recreational cannabis sales will be through the legal route by 2023. This, in itself, is a big growth trigger for the company.
In the United States, the company has already launched health and wellness CBD gummies, oils and soft gels. In the coming months, the company intends to expand with the brick-and-mortar model. Once a federal legalization bill is passed, there will be ample scope for multi-year growth.
Overall, with strong top-line growth and cash reduction, I expect the company to deliver profitability. Value added products like beverages, vapes and edibles can boost EBITDA margin in the coming years.
Aurora Cannabis (ACB)
ACB stock has been among the worst performers among cannabis stocks. In the last six months, APHA and CGC stock have delivered positive returns. However, for the same period, ACB stock has delivered negative returns of 28%.
Even with the underperformance, I believe that some exposure can be considered to the stock. It’s a risk worth taking. And I expect the following factors to be positive triggers in the next few quarters.
For the fiscal first quarter of 2021, the company reported EBITDA level loss of $57.9 million. Aurora Cannabis is targeting to deliver positive EBITDA in Q2 2021. If this target is achieved, I expect the stock to move higher.
On a quarter-on-quarter basis, the company’s cannabis net revenue has remained flat. The company is focusing on high-growth extract segments such as vapes, edibles and concentrates. If these segments deliver strong results, top-line growth will accelerate.
Aurora Cannabis has successfully reduced cost in the last quarter. The company is targeting further cost reduction through FY2021. Cash burn has been a major challenge as equity dilution has kept the stock depressed. If the company moves towards positive cash flow, the ACB stock can potentially double from current levels.
Given these triggers, some exposure to ACB is not a bad idea. Even with the stock underperforming peers.
Cronos Group (CRON)
CRON stock is another interesting name among cannabis stocks that’s making a strong comeback from oversold levels.
One of the key reasons to like Cronos Group is the financial backing. In March 2019, Altria (NYSE:MO) invested $1.8 billion in Cronos for a 45% stake in the company. Altria has the right to acquire an additional 10% stake in Cronos for $1.0 billion. Altria’s core business is a cash flow machine. Cronos Group therefore has a strong financial support for pursuing aggressive growth.
Besides this factor, the company has delivered steady top-line growth. Revenue increased from $12.1 million in 2018 to $23.8 million in 2019. For the current year, the company is on track to deliver revenue of $40 million (based on annualized year-to-date revenues).
Cronos is also diversified through brands that include the health, wellness, premium adult-use and medicinal cannabis. In the medicinal cannabis segment, the company has a pre-clinical research partnership with Technion for skin treatment.
In terms of global presence, Cronos has made inroads into Canada, Australia, Germany, Israel and the United States. I believe that the company has built a strong foundation for growth. These factors make CRON stock attractive for some exposure.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
