Earnings Show These 2 Marijuana Stocks Won't Be Going Up In Smoke
Investing.com | Feb 18, 2019 04:50
Once a popular trade among investors wanting to turn a quick buck, last year, with Canada's legalization of recreational marijuana in October, pot stocks gained legitimacy. So much so that it might be time to take these stocks more seriously and consider a few for a long-term, buy-and-hold portfolio.
However, the cannabis sector is still in its infancy, so tread carefully before making any selections. Nevertheless, there are a handful of companies, and their stocks, that look like clear winners in this early stage of the game. Recently released earnings reports provide some insight into which players are on the right track to profitability. Below, our two favorite picks:
h21. Canopy Growth/h2
Canopy Growth Corp. (NYSE:CGC) is an emerging, dominant player in the global marijuana trade. The Smiths Falls, Ontario-based producer proved its superiority quickly, by expanding its production, making strategic alliances and capturing significant market share in both recreational and medical cannabis businesses ahead of its competitors.
Canopy, whose stock closed at $47.56 on Friday, is the largest marijuana company by market cap. It currently has a 30% share of Canada’s rapidly expanding recreational market.
It also has the backing of alcoholic beverage giant Constellation Brands (NYSE:STZ), which, in August announced it was investing $4B USD in the marijuana grower, to acquire a nearly 40% stake, putting the Canadian company on a solid footing as it continues to grow.
The most recent evidence of Canopy’s positive growth momentum came last Friday after it reported its fiscal Q3 results. The company saw revenue of C$83 million, a jump of 282% from the same period a year earlier. The past quarter was particularly important for cannabis producers since it reflected the first full period during which recreational sales in Canada were legal.
Though Canopy reported a wider loss than the Street was expecting, its strong sales and recent growth initiatives point to a bright future. For example, Canopy is developing vape pens and marijuana-infused beverages with help from Constellation Brands, as a way to expand its offerings.
Canopy's other big advantage: the company is a market leader in both recreational and medical marijuana. During its latest quarter, medical cannabis accounted for about 23% of sales.
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Shares of Canopy have already surged more than 78% since the beginning of 2019, gaining more than 125% in the past year. We see a lot of potential growth remaining for this stock, particularly when the producer is well on track to expand into new value-added products.
As well, last month it established a foothold in the U.S. In January Canopy announced that it will spend up to $150 million to build a hemp processing and production facility in New York state.
h2 2. Aurora Cannabis/h2Another strong player in the industry is Aurora Cannabis (NYSE:ACB). The Edmonton-based company also reported its latest quarterly earnings last week, showing the strength of its business, which is almost equally divided between medical and recreational segments.
Shares of Aurora Cannabis, which closed on Friday at $7.05, have been under pressure since October, just after it debuted on the NYSE, falling alongside other stocks in the sector. During the spring and summer prior to its NYSE listing, the company announced two major acquisitions, MedReleaf Corp. and CanniMed Therapeutics, which together consolidated Aurora's market position in the medical segment.
Both deals also helped the company produce a whopping 363% increase in its fiscal second quarter sales, released last week, to $54.4 million. The company sold $21.6 million of legal recreational cannabis in the quarter, and made another $26 million from the sale of medical cannabis.
What we particularly like about Aurora is its transparency. The company has been quite open about its opportunities and challenges, highlighting supply issues in Canada that are stopping producers from ramping up sales. Unlike Canopy, Aurora has released its cost of selling per gram and the average net selling price.
This is particularly refreshing in an industry where analysts have no clear idea how to value these new players as they figure out how to make money in this burgeoning market.
Aurora posted a $237.7 million loss in its most recent quarter, dropping from $7.7 million in profit during the same period a year ago, citing “operating inefficiencies” that led to higher labor costs and unrealized fair value losses on derivatives. Gross margins fell 54% from 63% a year earlier.
Aurora operates in 21 countries with a strong presence in the European Union. It expects its global medical cannabis business to accelerate significantly in the coming years.
Aurora shares are up 30% since the beginning of the year after declining from their 52-week high of $12.52 in October. We see this stock continuing to gain momentum as Aurora overcomes its early-stage growth problems and consolidates its acquisitions.
Bottom Line
Betting on the future profitability of marijuana companies remains risky. Any investment might take longer to pay off than expected, given the evolving nature of the business and indeed the entire segment.
But if you're looking to invest over the long-term, say for the next five years, it's better to stick with the most powerful players in the industry. From that perspective we believe Canopy and Aurora are the two safest bets.
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