The past few years have been the best of times and the worst of times in the markets, but especially for weed stocks.
The split has been largely geographic. American weed stocks have done exceedingly well. Since 2019, shares of the two largest MSOs (multi-state operators) have nearly tripled and quadrupled. The biggest U.S. retailer and the biggest U.S. REIT (real estate investment trust) have done even better.
Canadian cannabis plays however, have struggled. Over the same period a basket of American cannabis stocks has delivered triple-digit gains, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) has provided total returns of negative 6%, including dividends. That’s even with some external help for the mostly Canada-focused fund: the current top holding, GW Pharmaceuticals (NASDAQ:GWPH), has more than doubled over the same stretch.
The question, obviously, is whether those geographic diverging fortunes will continue. Hopes for U.S. legalization have buoyed Canadian operators of late — but could be just as important for their American counterparts. Valuations on the U.S. side now look more questionable; there may be more value north of the border, assuming the supply glut in the Canadian market eases and international markets contribute.
Here are the top 10 weed stocks:
- Canopy Growth (NASDAQ:CGC)
- Cronos (NASDAQ:CRON)
- Aurora Cannabis (NYSE:ACB)
- Tilray (NASDAQ:TLRY)
- Hexo (NYSE:HEXO)
- Sundial Growers (NASDAQ:SNDL)
- GrowGeneration (NASDAQ:GRWG)
- Innovative Industrial Properties (NYSE:IIPR)
- Curaleaf (OTCMKTS:CURLF)
- Green Thumb (OTCMKTS:GTBIF)
Given the wider context, it’s worth considering where the biggest weed stocks sit at the moment. That requires an understanding of where they’ve been to figure out where they might be going. Let’s dive in.
Grading the Top 10 Weed Stocks: Canopy Growth (CGC)
Canopy Growth brought weed stocks to the mainstream. In 2017, alcohol giant Constellation Brands (NYSE:STZ,NYSE:STZ.B) had invested almost $200 million in Canopy the year before in a bid to create cannabis-infused beverages.
The following year, Constellation went bigger, infusing some $4 billion into Canopy. The deal sent CGC stock soaring and legitimized the entire industry overnight.
The problem has been everything that’s happened since then — which is to say, not enough. For the first nine months of FY2021 (ending March), Canopy posted an Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss of $246 million.
That’s roughly 56% of revenue. Canopy’s size and the capital raised from Constellation haven’t prevented the company from enduring same struggles dogging other Canadian operators.
Big losses and disappointing sales have in turn pressured CGC stock. On the day Constellation’s 2018 investment was announced, CGC closed at $32.11. In the nearly three years since, it’s dropped 16%.
But hope is far from lost: Canopy has put its cash to good use. Some has gone to build out a business that does have leading market share in Canada. The company has also positioned itself for U.S. federal legalization through its contingent acquisition of Acreage Holdings (OTCMKTS:ACRHF) and an investment in TerrAscend.
In short, the case for CGC stock unsurprisingly echoes that of the Canadian cannabis industry. The bull case might be simply delayed, rather than broken.
Later in 2018, Altria (NYSE:MO) followed Constellation into cannabis with a $1.8 billion investment into Cronos. CRON stock likewise soared on the news, gaining 21%. And it too, has stumbled since, dropping 36% over roughly 27 months.
But the Cronos story actually is an outlier in the industry — which makes the stock’s decline a bit more surprising. Cronos, by choice, sat out the aggressive building of capacity by Canopy and so many others that led to the current glut. Then-chief executive officer Mike Gorenstein said back in 2019 that “our business model is not to be the farmer.”
Instead, Cronos has invested its capital largely in research and development. (The one big acquisition, of CBD manufacturer Lord Jones, has not worked out.) Cronos Device Labs is working on improving vaping devices, while its fermentation efforts are expected to lead to a commercial launch this year. The company also retains plenty of cash to make acquisitions of companies with solid brands yet questionable balance sheets.
As a result of that strategy, this remains my pick in cannabis, as I wrote last month. But admittedly, that case has not played out so far.
Aurora Cannabis (ACB)
Aurora Cannabis executed the completely opposite strategy. Using cash and stock, the company looked to expand as fast as it could in Canada and beyond.
It’s a plan that worked when ACB stock was rising. Once the stock and the sector turned, however, financing dried up and Aurora found itself in trouble.
In response, the company has slashed costs in a bid to near profitability. But those cuts have hurt revenue growth, as seen in the hugely disappointing fiscal Q2 earnings report back in February.
The problem is that Aurora is still in trouble. Even after the cuts, it continues to burn cash. The assets for which Aurora overpaid aren’t enough to fix still-extant balance sheet problems. Capacity cuts haven’t yet moved profit margins to where they need to be.
ACB stock has seen some rallies of late, and there may be more short-term moves ahead. This remains likely the highest-risk and highest-reward play in the sector, as it’s been for some time. From a long-term perspective, the risks still seem greater than the rewards.
Tilray’s merger with Aphria, which closed this week, creates the largest cannabis company in the world — or so Tilray says.
Looking closer, the claim — based on total revenue of the two companies — is a bit thin. Big chunks of that revenue come from Aphria’s ownership of a German distributor (whose sales are not all of cannabis) and Georgia-based brewery Sweetwater Brewing. In terms of cannabis-only revenue, Tilray isn’t quite the leader.
Still, the merger does look intriguing. An estimated $81 million in cost synergies will be important in an industry that still needs to reduce expenses. Scale in Canada matters. Assets in Europe and the U.S. promise greater international growth going forward. Tilray is keeping respected Aphria chief executive officer Irwin Simon as the leader of the combined company, a seemingly smart choice.
As a result, my InvestorPlace colleague Joseph Nograles called Tilray “still the king” of the sector. Personally, I’m a little more circumspect.
I would have rather seen Aphria go it alone, or perhaps consider the acquisition proposal from an unnamed second suitor. Tilray’s business has never really stood out. The post-merger balance sheet is solid, but dry powder for acquisitions is limited relative to Canopy or Cronos. TLRY’s bizarre role in the “Reddit rally” doesn’t help.
Certainly, there’s a lot to like in what no doubt will be the first move in broader industry consolidation. But there are risks as well.
Somewhat quietly, the Hexo turnaround has made some progress. On Jan. 31, the company had 129 million CAD in cash against just 59 million CAD in total debt. Fiscal second quarter results were solid, with quarter-over-quarter growth and positive Adjusted EBITDA (even if the figure was just 202,000 CAD).
There’s still a lot of work to do. Positive Adjusted EBITDA still means negative free cash flow, and Hexo’s room for error is somewhat thin. The acquisition of Zenabis (OTCMKTS:ZBISF) makes some sense, but the all-stock deal dilutes current shareholders and adds Zenabis debt to the balance sheet to boot.
Still, in a sector where many smaller companies may fall by the wayside, Hexo now seems to have a real chance. And if the Zenabis deal works and the turnaround continues, consolidation may eventually mean that Hexo becomes the target, rather than the acquirer.
Sundial Growers (SNDL)
SNDL stock was one of the biggest beneficiaries of the Reddit rally. At one point, it traded just under $4 after opening the year at only 47 cents.
Like pretty much every other Reddit stock, SNDL’s peak was close to ridiculous. Normalcy has returned somewhat, but the stock still needs a corrective pullback.
After all, this is a company that simply put, hasn’t done all that well. It was one of the biggest offenders in borrowing to build out capacity; by early last year the company was at significant risk of bankruptcy. Some smart deals converted much of that debt to equity, but in turn diluted shareholders. The share count has ballooned to nearly 1.7 billion from barely 100 million less than two years ago.
All that borrowing and spending hasn’t built all that big a business: Sundial still has trailing twelve-month revenue of about $55 million. Like many of its Canadian peers, this company remains sharply unprofitable.
But as with many of its Canadian peers, the story isn’t necessarily over. Sundial has taken advantage of the Reddit pop to raise additional cash. Its turnaround has shown some signs of success, as I wrote at the end of last year. Plus Sundial is looking for acquisitions, and indeed made an unconventional run at Zenabis before Hexo stepped in.
All said, the turnaround still has a long way to go, which means price is important. With Sundial still sporting a fully diluted market capitalization of nearly $1.5 billion, the post-Reddit price still isn’t quite cheap enough.
Again, weed stocks in the U.S. have done far better than their Canadian counterparts. And of all the major weed stocks, none have performed better than GRWG.
This operator of hydroponic gardening stores has seen its stock rally 828% over the past year, and a staggering 1,800% since the beginning of 2019. The gains have by no means been the result of a bubble either: GrowGeneration has executed brilliantly.
Quick and successful nationwide expansion has basically crowded out any real competition, yet the company has remained nicely profitable during that expansion. As many have noted, GRWG has been a classic “picks and shovels” play. In the “green rush,” as in the “gold rush,” it’s been the suppliers who have seen the most success.
The only concern at this point is valuation. GRWG trades at a healthy 67x forward earnings multiple. That valuation isn’t obscene for a growing retailer, but barring international expansion there is a ceiling on the company’s footprint and profits.
Of late, GRWG has flatlined — it’s flat to early January levels — which might suggest more investors see the stock as fully valued. There might be some upside left, but investors expecting the torrid appreciation of the past two-plus years to continue will almost certainly be disappointed.
Innovative Industrial Properties (IIPR)
Another big U.S. cannabis winner has been IIP, the country’s first cannabis-driven real estate investment trust.
IIP builds assets like growhouses, dispensaries and processing facilities. It then leases those assets to medical cannabis producers and retailers.
It’s a smart model. IIP essentially is stepping in where banks still fear to tread, owing to the existing federal prohibition on marijuana. State-level operators don’t have the access to capital to build these properties themselves. IIP has that capital, and uses it to drive long-term revenue that is recurring and highly profitable.
To some degree, investors still are skeptical. IIPR trades at just 27x next year’s Wall Street estimate for AFFO (adjusted funds from operations, a common REIT measure). And the big risk is that the U.S. winds up with the same supply glut as Canada, pushing IIP tenants into bankruptcy and leaving the facilities empty.
That risk does seem potentially overwrought, particularly given the company’s focus on medical cannabis, where demand should be more consistent. Even with IIPR up ninefold from its late 2016 initial public offering price, there should be more upside ahead.
The bull case for Canadian operators wasn’t (or at least shouldn’t have been) based on the Canadian market being that large or that profitable. Rather, the argument was that Canada provided fertile ground for those companies to establish robust supply chains and valuable brands that could be put to good use in international markets.
But it’s looking increasingly likely that U.S. MSOs will provide stiff competition. Curaleaf is the largest such MSO, using its capital to expand across the country. In fact, outside of Tilray, it’s the largest cannabis company in the world by revenue. Curaleaf is fast-growing and profitable, key reasons why CURLF stock has been a huge outperformer in recent years.
And now it’s Curaleaf that is looking overseas. In March, the company inked a $286 million deal to buy one of Europe’s largest cannabis producers, EMMAC Life Sciences.
That deal alone makes CURLF stock intriguing. After all, it was hopes for global leadership that sent Canopy and Cronos soaring in late 2018 and early 2019. What if it won’t be one of those well-heeled Canadian giants, but a U.S.-based upstart, that winds up leading the way?
Green Thumb (GTBIF)
Investors in the MSO sector have another option in Green Thumb, the second- or third-largest MSO. Its sales are right in line with those of Trulieve (OTCMKTS:TCNNF).
Green Thumb is coming off a hugely impressive 2020. Revenue rose 157%, albeit with help from acquisitions. Adjusted EBITDA was 32% of sales, an enormous margin. The company even posted a GAAP (generally accepted accounting principles) profit.
GTBIF stock isn’t cheap. But it is cheaper than Curaleaf; Green Thumb has a lower market capitalization but actually outperformed Curaleaf in terms of Adjusted EBITDA in 2020. And with hopes for U.S. federal legalization higher than they’ve ever been, GTBIF could continue its winning streak going forward.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.