Once a popular trade among investors who wanted to change money quickly last year with the Canadian legalization of recreational marijuana in October, pot stocks gained legitimacy. So much so that it is perhaps time to take these shares more seriously and to consider a few for a long-term portfolio for buying and keeping.
However, the cannabis sector is still in its infancy, so walk carefully before making selections. Nonetheless, there are a handful of companies and their stocks that appear to be clear winners at this early stage of the game. Recently released earnings reports provide some insight into which players are on the right track towards profitability. Here are our two favorite choices:
1. Canopy Growth
Canopy Growth Corp. (NYSE 🙂 is an emerging, dominant player in the global marijuana trade. The Smiths Falls, Ontario-based producer has proven its superiority quickly by expanding its production, entering into strategic alliances and capturing a significant market share in both recreational and medicinal cannabis companies before its competitors.
Canopy, whose shares closed Friday at $ 47.56, is the largest marijuana company according to market capitalization. It currently holds a 30% stake in the fast-growing recreational market of Canada.
It also has the support of alcoholic drinks giant Constellation Brands (NYSE :), which announced in August USD 4B USD to invest in the marijuana grower, to acquire a share of close to 40%, making the Canadian company a solid position would come foot if it continues to grow.
The most recent proof of Canopy's positive growth momentum came last Friday after it reported its tax. The company saw sales of C $ 83 million, a jump of 282% over the same period a year earlier. The past quarter was especially important for cannabis producers because it reflected the first full period in which recreational sales in Canada were legal.
Although Canopy reported a larger loss than the street expected, strong sales and recent growth initiatives point to a bright future. For example, Canopy develops vapen pens and marijuana-soaked beverages with the help of Constellation Brands, as a way to expand its offer.
Canopy's other big advantage: the company is market leader in both recreational and medical marijuana. Medical cannabis represented about 23% of sales in the last quarter.
Shares of Canopy has increased by more than 78% since the beginning of 2019 and reached more than 125% last year. We still see a lot of potential growth for this share, especially when the producer is well on the way to expanding into new products with added value.
It also got a foothold in the United States last month. In January, Canopy announced that it will spend up to $ 150 million to build a hemp processing and production facility in the state of New York.
2. Aurora Cannabis
Another strong player in the industry is Aurora Cannabis (NYSE :). The Edmonton-based company also reported the last quarterly profit last week, showing the strength of its activities, which are almost equally distributed across medical and recreational segments.
Shares of Aurora Cannabis, closed on Friday at 7.05 am, were under pressure since October, just after it debuted on the side, alongside other shares in the sector. In the spring and summer preceding the NYSE listing, the company announced two major acquisitions, MedReleaf Corp. and CanniMed Therapeutics, who together consolidated Aurora's market position in the medical segment.
Both deals also helped the company with 363% more sales in the second quarter, which was released last week, to $ 54.4 million. The company sold $ 21.6 million of legal recreational cannabis in the quarter and earned another $ 26 million in sales of medical cannabis.
What we particularly appreciate about Aurora is its transparency. The company has been open about its opportunities and challenges, with attention to issues in Canada that prevent producers from increasing sales. Unlike Canopy, Aurora has released sales costs per gram and the average sales price
This is particularly refreshing in a sector where analysts do not have a clear idea of ​​how to value these new players while they figure out how to make money in this fast-growing market
Aurora recorded a loss of $ 237.7 million in the last quarter and dropped $ 7.7 million a year ago in the same period, citing "operational inefficiencies" that led to higher labor costs and unrealized write-downs derivatives. Gross margins fell 54% compared to 63% a year earlier.
Aurora is active in 21 countries with a strong presence in the European Union. It expects its global medicinal cannabis activities to accelerate significantly in the coming years
Aurora shares have increased by 30% since the beginning of the year, after they were down from their highest point in 52 weeks of $ 12.52 in October. We see that these stocks are still gaining momentum, because Aurora is overcoming the growth problems at an early stage and consolidating its acquisitions.
Bottom Line
Betting on the future profitability of marijuana companies remains risky. Every investment can take longer than expected, given the changing nature of the company and even the entire segment.
But if you want to invest in the long term, say for the next five years, you can stay with the most powerful players in the sector. From that perspective, we believe that Canopy and Aurora are the two safest bets.
