You hear that? That’s the sound of the beginning of a big rebound in marijuana stocks. Over the past few trading days, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) is already up nearly 5%, representing one of biggest upward moves the beaten-down ETF has staged over the past year.
The big rebound in pot stocks can be chalked up to a few things. There have been some favorable fundamental developments, as multiple cannabis companies have reported better-than-expected numbers in January and February. There have also been some favorable legal developments, as more and more U.S. states continue to push forward with cannabis legalization while Canadian provinces are adopting a more aggressive approach to retail store openings.
That’s the good news for cannabis bulls. The better news? This big rebound in marijuana stocks is just getting started.
Over the next several quarters, everything is going to improve for the cannabis sector. Demand trends will re-accelerate thanks to new vapes and edibles products, as well as retail footprint expansion. Supply overhang issues will ease with rebounding demand. International markets will start to take off as governments around the world follow in Canada’s footsteps. Revenue growth trends will improve. Margins will bounce back. Losses will narrow.
All in all, things will just get better for the cannabis sector in 2020, and as they do, depressed and beaten-up pot stocks will rebound. Among the best marijuana stocks to buy for 2020 are:
- Canopy Growth (CGC)
- Cronos (CRON)
- Aphria (APHA)
- Aurora Cannabis (ACB)
So, without further ado, let’s take a deeper look at those four top marijuana stocks to buy for the big 2020 rebound.
Canopy Growth (CGC)
The cannabis market’s biggest and most important company, Canopy Growth (NYSE:CGC), delivered strong third quarter numbers in mid-February which lay the groundwork for this stock to head meaningfully higher over the next several months.
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.
All of this will continue for the foreseeable future.
Rebounding top-line growth will continue thanks to new product launches and new store openings in Canada. Margins will keep expanding thanks to higher facility utilization and less promotional activity. Losses will keep narrowing as management focuses on gutting the expense model.
Net net, the trio of rebounding growth, expanding margins, and narrowing losses should propel CGC stock way higher in 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 (NASDAQ:CRON). This unique feature positions CRON stock for a strong showing in 2020.
We have yet to hear from Cronos so far in 2020. But, we have heard from pretty much every other marijuana giant in Canada over the past two months, and the messaging has been broadly consistent. Cannabis 2.0 products plus new store openings will recharge revenue growth in 2020, while high factory utilization, less discounting, and reduced marketing and expansion spend will lead to improved profitability.
All of that should happen for Cronos, too, because this company is one of the fastest growing players in the space with huge financial backing.
Also of note, CRON stock is fairly cheap relative to the group, trading at just 8.6-times one-year forward sales, versus a 13.7-times one-year forward sales multiple for CGC. This undervaluation, which has been around for a while, has historically laid the groundwork for Cronos stock to outperform during cannabis bull markets. Just look at the first three months of 2019, when CRON stock rallied 80% to CGC’s 60% gain.
In 2020, the same dynamic will repeat. A bull market will come back to marijuana stocks, and as it does, relative undervaluation and a strong balance sheet will turn Cronos stock into an out-performer.
Although most pot stocks are up in February, shares of cannabis producer Aphria (NYSE:APHA) are not, mostly because the company reported second quarter numbers in January that missed across the board, and which have had a lingering impact on the stock.
Revenues missed estimates, as did profits. And management dramatically cut its full-year guide. In response, APHA stock is down 20% year-to-date.
This weakness won’t last.
It’s a gross overreaction to a few headline second quarter misses. Underneath those misses, the 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. Revenue, volume, margin, and profit trends all got better.
That’s before the launch of new vapes and edibles products, and before a ton of new retail store openings across Canada.
As such, the numbers will only get better in the third and fourth quarters. As they keep improving, investors will push APHA stock way higher, especially considering its relatively depressed valuation base (2-times one-year forward sales).
Last, but not least, on this list of marijuana stocks to buy for the big rebound in 2020 is Aurora (NYSE:ACB).
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.
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.
Improved profitability and healthier cash flows lay the foundation for ACB stock to head meaningfully higher, especially considering just how beaten up this stock is (83% off its 52 week highs).