The legal cannabis industry is budding before our eyes, and investors have clearly taken notice.
Though estimates vary wildly, a handful of Wall Street investment banks are counting on the global weed industry to crank out sales of $50 billion to $75 billion a year by the end of the next decade. With so much revenue to go around, there are bound to be some very big long-term winners in this space. The question, of course, is what stocks those winners will be.
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These four brand-name marijuana stocks are getting all the attention
According to current market caps, investors seems to believe that Canopy Growth (CGC 2.91%), Aurora Cannabis (ACB 3.89%), Tilray (TLRY +0.00%), and Cronos Group (CRON 0.59%) represent the best way to play the cannabis industry. Among growers, Aurora and Canopy slot in as Nos. 1 and 2, respectively, in terms of annual peak production, while Tilray and Cronos are liable to be well inside the top 10 in terms of annual aggregate production.
These are also companies that have done a good job of landing brand-name partners or pushing into overseas markets. Canopy Growth closed a $4 billion equity investment from Constellation Brands last November, Cronos Group closed a $1.8 billion equity investment from Altria earlier this month, and Tilray secured partnerships with Novartis' generic-drug subsidiary Sandoz and Anheuser-Busch InBev (BUD 0.55%) in December. Even though Aurora hasn't yet landed a major partner, its presence in 24 total countries is unmatched by its peers.
With each of these brand-name pot stocks presumably offering their own blend of long-term advantages, choosing which one has the best outlook may not be easy. But, according to Wall Street, the choice is pretty simple. Since analyst coverage, including price targets, is now available for all of the major pot stocks, there's one company that the Street believes stands out as the most attractive right now.
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It's definitely not this pot stock
Among brand-name marijuana stocks, Cronos Group is certainly not a Wall Street favorite, nor a company yours truly favors, either. Based on existing price targets, Cronos Group is projected by Wall Street to have 45% downside, which is probably why it's one of the only marijuana stocks to have two underperform ratings.
On one hand, Cronos Group does now have a boatload of cash (more than $1.8 billion) to execute on its long-term business strategy, which presumably includes diversifying its product portfolio, pushing into international markets, making complementary acquisitions, and perhaps increasing its production capacity.
But this is also a company that, with maybe 120,000 kilos of peak production, is now only eighth in projected annual output in Canada. Investors could instead opt to buy OrganiGram Holdings, which has virtually the same projected peak annual output (113,000 kilos), with more than double the industry average yield per square foot, for a quarter of Cronos' market cap.
Cronos has also done poorly in pushing into overseas markets. With the exception of distribution sites in Poland and Germany and grow farms in Australia and Israel, Cronos' international presence is minimal compared to its brand-name peers. Without extensive overseas sales channels, Cronos could be exposed if domestic dried cannabis becomes overproduced and commoditized by early next decade.
Check out the latest earnings call transcripts for Tilray, Cronos Group, and other companies we cover.
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It's not this top-tier grower, either
Despite hiring billionaire fund manager Nelson Peltz as strategic advisor earlier this month, it's not Aurora Cannabis, either. According to Wall Street, Aurora's gains are capped at about 8% from its current share price.
Obviously, Aurora does have a lot working in its favor, including industry-leading production when it's at full capacity. The company has conservatively called for more than 500,000 kilos of annual run-rate production by mid-2020, but I believe it'll be closer to 700,000 kilos a year by the end of 2021, once ICC Labs is developed in South America. Generating so much cannabis should lead to low per-gram growing costs, help with landing lucrative long-term supply deals, and may even lure in a brand-name partner.
Then again, this is a company that, as noted, doesn't currently have a brand-name partner, and has been torturing its longtime shareholders by utilizing its common stock as monopoly money to fund acquisitions. Since the end of fiscal 2014 (June 30, 2014), Aurora Cannabis has issued more than 1 billion shares of common stock, which is going to make it that much harder for the company to turn a meaningful profit on an operating basis.
It's also unclear what sort of partner Nelson Peltz will help Aurora land. While Peltz's expertise is in the food and beverage industry, not all of the billionaire's deals with Trian Fund Management, the investment fund he founded, turned out successfully. For now, Wall Street appears cautiously optimistic with Aurora.
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Close but no cigar
Wall Street also believes it won't be the second-largest grower, Canopy Growth, even though it has double the upside of Aurora at 16%, based on its current market cap.
Canopy Growth has 10 cultivation facilities that span 5.6 million aggregate square feet, with over 4.3 million square feet licensed by Health Canada as of its mid-February-released third-quarter report. All told, this should be more than enough grow space to surpass 500,000 kilos a year, making it the only grower able to give Aurora a run for its money on the production side of things.
Like Cronos, Canopy Growth is also flush with cash following the closure of its equity investment. Canopy had nearly $3.7 billion in cash and cash equivalents at the end of calendar year 2018 following the acquisition of hemp-research company ebbu. Canopy plans to use its cash to move into new overseas markets, make complementary acquisitions, and expand its sales channels, which includes hemp processing and production in the United States.
However, Canopy Growth's obsession with reinvesting back into its business, building up its recreational brands, and expanding its product offerings, will ensure it remains unprofitable through fiscal 2020. It might be one of the only pot stocks to be unprofitable next year, which is a big red flag against what's otherwise a well-thought-out strategy.
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And the winner is...
According to Wall Street, Tilray offers the most upside by a longshot among these popular pot stocks. Though estimates vary, the consensus is that Tilray has 62% upside from its current market cap.
Why Tilray? Chances are, it's the company's focus on medical marijuana patients (something Aurora is also doing), as well as its brand-name partnerships. Medical pot patients are often far more willing than recreational users to purchase alternative cannabis products, such as oils and sublingual sprays. Alternative products have considerably higher price points than dried cannabis flower, making them a higher-margin and more lucrative product for pot stocks like Tilray.
There's also excitement surrounding Tilray's partnership with Anheuser-Busch InBev that'll lead to each company putting up $50 million (for a combined $100 million). Nonalcoholic cannabis-infused beverages should be legalized for sale by no later than the one-year anniversary date of recreational legalization in Canada (Oct. 17), giving Tilray and Anheuser-Busch InBev a means to go after first-time users and more frequent medical marijuana users.
The downside, though, is that Tilray is losing money hand over fist. The company's fourth-quarter and full-year results featured a full-year operating loss of $57.7 million, a net loss of $67.7 million, and fourth-quarter kilogram equivalent sales of a meager 2,053 kilograms. None of these figures are particularly cheerworthy for a pot stock with a $7 billion market cap.
While Wall Street prefers Tilray, yours truly believes you should think small if you want to prosper with pot stocks.
