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 in a big way in 2020.
In January, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) was up nearly 10% year-to-date.
Then, the coronavirus pandemic hit… and the global economy has since come to a screeching halt, while stocks everywhere have fallen off a cliff.
Marijuana stocks have fared no differently. After all — even though there has been some “panic buying” of weed in Canada recently — heavily indebted, cash-poor, and richly valued cannabis companies won’t fare well if the coronavirus pandemic slips the global economy into a recession.
The marijuana stocks ETF, MJ, has dropped 50% off its early 2020 highs. This pain in cannabis stocks will last until the coronavirus pandemic clears up.
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 May.
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. 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, delivered strong third quarter numbers in mid-February which showed that things are moving in the right direction.
In the third quarter, Canopy: 1) reversed declining volume and revenue trends, and posted meaningfully positive revenue and volume growth, 2) reported gross margin expansion, and 3) reported a narrower adjusted loss versus the previous quarter. In other words, the quarter checked off every box investors wanted it to — rebounding top-line growth, improving margins, and narrowing losses.
And they did so emphatically, not just marginally. “We had expected only small improvements from the prior quarter, but Canopy is showing a meaningful progression,” wrote MKM Partners analyst Bill Kirk in a note following Canopy’s earnings.
Of course, this was all before the coronavirus pandemic. So long as the virus keeps spreading throughout North America, the company’s improving financial trends likely won’t persist.
But, Canopy has several billion dollars on the balance sheet to withstand a near-term impact from COVID-19. Even further, if the virus fades away by May, then the big momentum this company has in early 2020, will come back, and 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, to spark a rip-your-face-off type rally in shares in the second half of 2020.
Outside of Canopy, the only other “high quality” cannabis company that has won the multi-billion dollar support of a consumer staples giant is Cronos. This unique feature positions CRON stock as one of the better marijuana stocks to buy for a second-half 2020 rebound for two big reasons.
First, the company’s cash-fortified balance sheet 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, as a result of the coronavirus.
Second, huge resources give the company ample opportunity to invest in strategic growth opportunities once the virus fades, and capitalize on rebounding Canadian cannabis demand trends. Such investments could include broader distribution, more products, reduced productions costs, so on and so forth.
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 33% year-to-date. As such, present weakness looks like an opportunity… only 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.
Revenues missed estimates, as did profits. And management dramatically cut its full-year guide. Then, coronavirus hit. Put it all together, and APHA stock is down 60% year-to-date.
This weakness should reverse course once COVID-19 headwinds pass.
Underneath headline misses, Aphria’s early 2020 numbers were actually pretty good. Revenue growth accelerated sequentially, from up 8% quarter-over-quarter in Q1 to up 9% quarter-over-quarter in Q2. Volume growth also accelerated, and by way more, going from 7% growth in Q2, to 18% growth in Q2. Gross margins reversed course, after dropping to 50% in Q1, and shot back up to 57% in Q2. At the same, Aphria reported a huge sequential increase in adjusted EBITDA after a sequential drop in Q1.
In other words, all of the company’s important underlying trends improved meaningfully in the second quarter.
Sure, this improvement won’t last so long as coronavirus headwinds impact cannabis demand. Plus, Aphria doesn’t have deep pockets to absorb sustained weakness from coronavirus.
But, the base case here is for COVID-19 to pass within the next few months, and for cannabis demand trends globally to rebound. If so, then APHA stock appears to be shaping up for a big second half rebound (but things will likely get worse before they get better, so be patient).
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, which on top of rebounding demand trends from cannabis 2.0 products and new retail store openings, 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.
I think they do. But it’s admittedly a big risk. So, much like other pot stocks, I’d shy away from from ACB stock until after coronavirus headwinds clear and demand trends rebound.