With increasing possibility of cannabis legalization at federal level, weed stocks seem like a good investment theme. It’s worth noting that eighteen states containing 40% of the U.S. population have already legalized cannabis. This already presents a big market opportunity. However, weed stocks are likely to surge once federal legalization happens.
At the same time, it’s worth noting that U.S. is not the only big market for cannabis. Europe and Canada also have a big addressable market. The global cannabis market is expected to be worth $84.0 billion by fiscal year 2028. Therefore, a major part of growth is still impending for the sector.
While I am bullish on weed stocks, most of the stocks in the sector have been significantly volatile in the last 24 months. As an example, Aurora Cannabis (NYSE:ACB) stock has a beta of 3.18. Similarly, Sundial Growers (NASDAQ:SNDL) has a beta of over 6.0.
In my view, it makes sense to consider exposure to relatively lower beta stocks. This column will discuss four weed stocks that are best positioned to benefit from industry tailwinds in the coming years. These stocks have relatively low volatility and company specific fundamentals look strong.
Let’s take a deeper look into factors that make these weed stocks attractive.
- Canopy Growth (NASDAQ:CGC)
- Cronos Group (NASDAQ:CRON)
- Tilray (NASDAQ:TLRY)
- Curaleaf Holdings (OTCMKTS:CURLF)
4 of the Least Volatile Weed Stocks: Canopy Growth (CGC)
CGC stock is among the relatively less volatile weed stocks. For year-to-date FY2021, the stock has been sideways. With Federal marijuana legalization very likely, CGC stock seems attractive.
From a growth perspective, the outlook is attractive for Canopy. The company reported revenue growth of 23% to $152.5 million for the third quarter of 2021. EBITDA loss also narrowed to $68.4 million as compared to $97 million on a year-on-year basis.
For the next three years (through FY2024), the company expects to achieve annual revenue growth in the range of 40% to 50%. Further, with cost cutting, the company has guided for positive operating cash flow in FY2023. Positive free cash flow is expected in the subsequent year.
With product innovation in the recreational cannabis segment coupled with focus on health and wellness, strong growth seems likely. It’s also worth noting that as of Q3 2021, the company reported $1.6 billion in cash and equivalents. This is likely to help the company navigate the cash burn period.
Further, once U.S. markets open up, revenue growth is likely to remain robust even beyond FY2024. These factors have ensured that CGC stock remains relatively resilient at current levels.
Weed Stocks: Cronos Group (CRON)
CRON stock is also among the quality weed stocks. In the last six months, the stock has been in a consolidation mode (with some volatility). During this period, the stock has returned just 1.5%. I believe that a break-out on the upside seems imminent with regulatory tailwinds.
FY2020, Cronos reported revenue of $46.7 million, which was higher by 97% on a y-o-y basis. An important point to note is that the company’s revenue from the U.S. surged by 182%.
On the flip-side, Cronos reported an adjusted EBITDA loss of $147.3 million in FY2020 as compared to a loss of $98.3 million in FY2019. However, with the company investing in growth, I would not be worried about the cash burn.
For FY2020, the company reported cash and short-term investments of $1.3 billion. The cash buffer provides headroom for continued investment in sales and marketing.
Cronos Group has a strong portfolio of brands that includes products for wellness, premium-adult use and mass market products. The company’s wellness brand, Peace Naturals, has strong presence in high-growth markets of Canada, Germany and Israel. In the United States, the company is currently manufacturing and distributing hemp derived supplements and cosmetic products.
Clearly, the company is establishing presence in key markets. Once growth in the cannabis sector reaches inflection point, Cronos is positioned to benefit.
TLRY stock recently closed the merger with Aphria and the stock looks attractive for upside. Post-merger, Jefferies has assigned a “buy” rating to the stock with a price target of $23. This would imply a steep upside of from current levels of $15.35 as of midday May 11, 2021.
With the merger creating the largest global cannabis company by revenue, Tilray is well positioned for growth. The merged entity already has a leadership position in adult-use cannabis market in Canada. Canopy Growth is a close second.
In terms of specific regions, Tilray has an EU-GMP low-cost Cannabis cultivation and production facility in Europe. This will help the company cater to the European market, which is likely to be worth $3.9 billion by FY2025.
In the United States, Tilray has acquired Craft Beer’s manufacturing and distribution infrastructure. Once cannabis is legalized, the infrastructure will help in ramping-up presence through the country. The company is already selling branded hemp and CBD products.
Another important point to note is that Aphria has generated positive EBITDA for the last six quarters. With merger synergies and sustained growth, it’s likely that EBITDA margin will continue to expand in the coming years.
Overall, TLRY stock is among the weed stocks with low volatility and a bright outlook in terms of revenue and cash flow growth.
Curaleaf Holdings (CURLF)
CURLF stock is among the top weed stocks with low volatility. In the last one-year, the stock has trended higher by 219%. With robust growth and leadership position in the United States, the stock continues to look attractive.
For Q4 2020, the company reported revenue growth of 186% to $233.3 million on a y-o-y basis. For the same period, the company reported EBITDA growth of 290%. Strong growth coupled with improving EBITDA margin explains the reason for stock upside.
The company already has a strong distribution platform across 23 states in the U.S. Potential federal legalization is likely to have a significant impact on growth. Further, in April 2021, Curaleaf completed the acquisition of EMMAC. The latter is the largest European independent cannabis company.
Curaleaf is also focused on growth in the medicinal cannabis segment. The company already has two partnerships with pharma companies and pre-clinical research in underway. The medicinal cannabis sector still lacks evidence-based products. Focus on clinical research is likely to be a differentiating factor for the company.
It’s also worth noting that research and development activities translated into the launch of 32 new formulated products in Q4 2020. As the product portfolio increases through inorganic growth and investment in research, the company has a bright outlook for the long term.
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 modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.