Coming into 2020, the bull thesis on marijuana stocks looked pretty compelling. Cannabis demand trends in Canada were set to improve on the back of more aggressive retail store openings and new product launches. Supply trends were also set to improve as companies reduced production expansion. Revenue and profits — which were slammed in 2019 — were consequently positioned to move higher.
That’s why, though mid-January, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) was up nearly 10% year-to-date.
Then, the coronavirus pandemic hit. The global economy has since come to a screeching halt. Stocks everywhere have fallen off a cliff. Marijuana stocks especially, because these companies are, for the most part, heavily indebted, cash-poor, and richly valued.
Fortunately, it appears that — if consumers, private institutions, and governments globally take the right steps to practice and enforce social distancing — the Covid-19 pandemic could clear up in June, and that economic activity will gradually normalize thereafter.
If/when it does, I’d look to buy into severely beaten-up pot stocks.
This group is now significantly undervalued relative to the industry’s long-term growth potential. Once the virus clears up, the early 2020 bull thesis will come back into focus. Revenue trends will improve on the back of store openings and new products. Margin trends will improve on the back of reduced production expansion and cost-cutting measures. Revenue growth plus margin expansion should lead to narrowing losses, and in some cases, bigger profits.
All of that will pave the path for big gains in the back-half of the year.
Once Covid-19 clears up, some of the best marijuana stocks to buy for a potential second-half 2020 rebound are:
- Canopy Growth (NYSE:CGC)
- Cronos (NASDAQ:CRON)
- Aphria (NYSE:APHA)
- Aurora Cannabis (NYSE:ACB)
Marijuana Stocks to Buy for the Rebound: Canopy Growth (CGC)
The cannabis market’s biggest and most important company, Canopy Growth, looks ripe for a big second-half rebound for three big reasons.
First, the company has the cash to withstand a near-term demand impact from the coronavirus. With $1.6 billion in cash and investments, two to three months of sluggish demand will simply be absorbed by the balance sheet.
Second, Canopy reported numbers in mid-February which imply that this company had a ton of momentum coming into this crisis. That is, in the third quarter, Canopy: 1) reversed declining volume and revenue trends, 2) reported gross margin expansion, and 3) reported a narrower adjusted loss versus the previous quarter.
Third, this robust momentum should come back once the virus fades. Canada will proceed with more aggressive retail store openings. The cannabis supply glut in Canada will be reduced thanks to production cuts and a sudden surge in “panic weed buying”. New vapes and edibles products will invigorate demand. Cost cutting and focused investment initiatives at Canopy will lead to better margins.
Net net, the company will report strong numbers in the back-half of 2020. Those strong numbers have the potential to converge on what is a significantly beaten-up CGC stock price, and spark a rip-your-face-off type rally in the stock.
Outside of Canopy, the next best marijuana stock to buy for a second-half rebound is Cronos.
The second-half bull thesis on Cronos boils down to two things.
First, the company’s cash-fortified balance sheet ($1.4 billion in cash and investments) gives them the resources to withstand a near-term demand impact from Covid-19. Insolvency is not a huge risk for this company today, or anytime soon.
Second, huge resources give the company ample firepower to invest in strategic growth opportunities once the virus fades. This firepower will enable Cronos to capitalize on rebounding Canadian cannabis demand in the second-half of 2020, paving the path for big growth over the next few quarters.
All in all, then, Cronos will weather the coronavirus storm better than other cannabis producers, and has ample firepower to recharge growth in the second half of 2020.
This reality isn’t reflected in CRON stock, which is down 25% year-to-date. As such, present weakness looks like an opportunity… once coronavirus headwinds pass.
Shares of cannabis producer Aphria have struggled significantly in 2020, mostly because the company reported second quarter numbers in January that missed across the board.
But, the company did manage to report much better numbers in mid-April. Those much better numbers have breathed life back into the stock. Still, year-to-date, APHA stock is down more than 30%.
Aphria stock will continue to climb its way back over the next few quarters, for three big reasons.
First, the Canadian cannabis market will rebound in the back-half of 2020, on the back of more store openings, new products, and a reduced supply glut.
Second, Aphria has strong momentum heading into that rebound. Revenue growth is accelerating. Volume growth is accelerating. Gross margins are expanding. Adjusted profits are rising.
Third, Aphria has $345 million in cash and investments to help weather this near-term coronavirus storm, and come out the other side ready to grow rapidly.
Net net, the current recovery in APHA stock will likely persist into the second half of the year.
Last, but not least, on this list of marijuana stocks to buy once coronavirus headwinds pass is Aurora.
Aurora has long been the second-biggest player in the Canadian cannabis market, coming in right behind Canopy in terms of sales, volume, and production capacity. But investors have increasingly expressed concerns over the company’s balance sheet and liquidity, as Aurora features one of the worst balance sheets in the cannabis sector and has a major cash burn problem.
These concerns are have only grown louder amid the coronavirus outbreak.
Management is trying to fix these problems. The company is going from “spend at all costs” mode in 2019, to “save cash at all costs” mode in 2020. Changes coming in 2020 include a new C-Suite, a ton of layoffs, reduced production capacity expansion, balance sheet restructuring, and much more.
In sum, these changes are actually good news. They will lead to lower operating and capital expenses. On top of rebounding demand trends, these lower expenses should translate into improved profitability and healthier cash flows in the back half of 2020.
The big question, though, is whether or not Aurora has the resources to withstand demand headwinds in the first half of 2020 from Covid-19.
With $220 million in cash on hand and another $250 million on the way through an At-the-Market Offering program, Aurora appears to have enough resources to live another day. But, it’s admittedly a big risk. So, I’d shy away from ACB stock until after coronavirus headwinds clear.