In December, the Democrat-led House quietly passed the MORE Act, otherwise known as the Marijuana Opportunity Reinvestment and Expungement Act. Marijuana stocks, as measured by ETF Horizons Marijuana Life Sciences Index (TSE:HMMJ), rose just 30%.
Wall Street’s sleepy response might go down as one of the biggest underreactions in history. Few people realize that Americans spend $5.8 billion on marijuana products each month, while sales of tobacco products continue to fall. And with the possibility of legal pot tantalizingly near, these small billion-dollar Canadian companies could become the next hundred billion-dollar firms.
Marijuana stocks have long resembled a real-life version of the French play Waiting for Godot. Many frame the Republican leader, Sen. Mitch McConnell, as the villain, but broader resistance from many conservative politicians have stonewalled efforts to move federal legalization forward. Even state and local legislators have fared no better – the tangle of state laws has left marijuana producers and sellers in a state of pseudo-legality.
Marijuana stocks have suffered the consequences. Barred from doing business at the federal level, companies saw their shares drop up to 95% from their 2018 peaks. And because these companies list on U.S. exchanges, they’re also barred from doing business even in legal marijuana states.
The results of the 2020 election, however, has turned the tide. With Democrats now in control of the Senate, Congress could finally vote on the MORE Act and open the floodgates to the $78 billion-per-year U.S. marijuana market.
In a country that spends almost as much money on marijuana as it does on tobacco, it’s easy to see why cannabis companies could one become worth Philip Morris (NYSE:PM) and Altria’s (NYSE:MO) combined $200 billion value.
So, how to find these winners? Broadly, investors should choose only the strongest players. Just like any other semi-legal industry, the marijuana industry is full of hucksters and frauds. Only the best-run have a lower risk of management running off with your money.
Investors should also recognize how much risk they’re willing to take.
- Cannabis producers (farmers/growers): These tend to have both higher financial and operating leverage – while they could rise the most, they’re also likely to go under if the Senate stalls on the MORE Act.
- Cannabis marketers (brands/distribution): These offer less upside in the short term, but also have better downside protection. In the long term, they’re the companies most likely to replace Big Tobacco.
To get you started, here are the four marijuana stocks with strong potential.
- Canopy Growth (NASDAQ:CGC)
- Cronos Group (NASDAQ:CRON)
- Tilray (NASDAQ:TLRY)
- Aurora Cannabis (NYSE:ACB)
Marijuana Stocks to Buy: Canopy Growth (CGC)
Canopy Growth has long been the lead dog of marijuana stocks. Owned by parent company Constellation Brands (NYSE:STZ), Canopy has delivered a strong lineup of “Cannabis 2.0” products ranging from chocolates to beverages. The company’s branding efforts have paid off. Its shares are down less than a third from their 2018 peak while the rest of the industry has plummeted.
CGC stock might not be the biggest winner gainer in 2021 – investors price its high-quality shares at a premium. But long term, it’s the company that’s most likely to become the next Philip Morris. Its parent Constellation Brands already owns and distributes Corona, Modelo, Meiomi Wines and Svedka Vodka, among others. And with a comprehensive portfolio of existing products, Canopy can quickly slot into distribution channels as individual states each legalize marijuana.
With a market cap of just $14 billion, Canopy Growth looks vastly undervalued for the potential American market. As the MORE Act moves through the Senate, CGC stock could be worth north of $100.
In 2019, Altria, the tobacco giant that owns Marlboro, bought 40% of Cronos, a Canadian marijuana company. And though CRON shares have lost 50% from their peak, the company remains one of the most outstanding marijuana stocks. Its six brands and a massive $1.3 billion war chest rivals Canopy Growth in its stability.
Altria’s ownership also adds a layer of safety. The tobacco giant, which also owns vaping company Juul Labs, has long tried to extricate itself from the world of cigarettes. Philip Morris USA, one of Altria’s subsidiaries, has long explored smoke-free alternatives – something unthinkable just a decade ago. So, how can a cigarette company survive without cigarettes?
Cronos provides a way out. With a lineup of CBD infused products, vapes, and old-fashioned marijuana flowers, Cronos could help its aging parent transition to a tobacco-free world.
If you’re looking for a potential short-term winner, Tilray looks like a golden lottery ticket. Its rock-bottom stock price, coupled with high operating leverage, means its shares are poised to take off.
The marijuana grower has been a poster child for marijuana over-optimism. Anticipating U.S. legalization, the company spent almost $200 million expanding in Europe, Canada, Australia and New Zealand. Demand, however, never materialized. With its massive overhead costs, Tilray lost almost $500 million in 2020. This year looks more of the same.
And that’s what makes Tilray stock so interesting. As a producer of lower-priced marijuana, the company sits on a knife’s edge of success and failure. Put another way, when your gross margins are only 7%, even a 10% change in marijuana price can double or wipe out your profits.
In November, I wrote that Tilray could rise to $95 on a Biden win, a 1,500% upside gain. With shares already up 170% since the election, federal legalization can still make this a reality.
Aurora Cannabis (ACB)
Wrapping up marijuana stocks for 2021 is Aurora Cannabis, the winner of the dubious “worst overproducer of cannabis” award. Like Tilray, Aurora sits precariously between massive success and total failure.
Aurora was once the most aggressive legal marijuana producers – investors rewarded management handsomely, pushing shares from $4 to almost $130 by 2018. Such joy, however, couldn’t last. As U.S. legalization failed to materialize, ACB stock fell back to earth, wiping out virtually all investor gains. The company has since closed all but four of its 18 production sites.
The MORE Act could help Aurora rise again. As a low-cost producer, Aurora needs high volumes to survive. And if federal legalization happens, shares of this relatively weaker company could easily push $100.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.