There are hundreds of marijuana stocks that you potentially could buy. The list includes a lot of stocks with tiny market caps that you probably wouldn't want to invest in. Still, there are plenty of choices.
But Stifel analyst Andrew Carter recommends buying only one of them. He calls this marijuana stock "the best investable opportunity for capitalizing on the growth of the global cannabis category." Which stock is it? The biggest of the pure-play marijuana stocks: Canopy Growth (CGC 6.69%).
One of the main reasons why Carter likes Canopy Growth is the company's industry-leading sales production. Canopy claims the No. 1 market share in Canada's adult-use recreational marijuana market. Although several of its top rivals have already announced results for the quarter ending March 31, 2019, Canopy hasn't done so yet. But in the previous quarter, Canopy reported by far the highest level of sales.
Canopy Growth's sales dominance stems from several key factors. First, the company has ample production capacity. That capacity has been extremely important, as demand for cannabis still outstrips supply in Canada. Second, the company built strong distribution channels, with supply agreements in place with all of Canada's provinces. Third, Canopy has a solid international presence, coming in a strong second place in overall international sales.
Carter also views Canopy's strong balance sheet as a big plus. At the end of its last quarter, Canopy reported cash, cash equivalents, and marketable securities of around $3.7 billion. The company had long-term debt of a little over $580 million.
Canopy's huge cash stockpile is a direct result of the $4 billion investment from large alcoholic beverage maker Constellation Brands. The influx of cash from Constellation gives Canopy Growth by far the biggest cash stockpile in the cannabis industry.
The American way
While Carter likes Canopy Growth's financial status, there's something else about the company that he likes even more: Canopy's pathways to enter the U.S. market. Canopy Growth has taken two key steps to make its move into the U.S.
In January, Canopy announced that it had secured hemp production licenses in New York state and planned to build a major hemp facility there. This move came hot on the heels of the U.S. legalization of hemp in December 2018. Canopy Growth founder and co-CEO Bruce Linton said in February that the company expects to have hemp products on sale in the U.S. by the end of this year.
Canopy Growth surprised many observers in April with an even bigger announcement. The company confirmed that it planned to acquire U.S.-based cannabis producer Acreage Holdings for $3.4 billion. There was a catch, though: The deal will only be finalized if the U.S. changes its laws so that marijuana isn't illegal at the federal level.
Access to the U.S. market is a must for any Canadian cannabis producer to grow as much as they hope. The U.S. is the largest marijuana market in the world. Canopy Growth has taken more concrete steps to jump into the U.S. than any of its peers have.
The only one?
It's hard to argue against Carter's logic in picking Canopy Growth as the top marijuana stock to buy. He's right about the company's strong financial position and its positioning in entering the massive U.S. market. But is Canopy Growth really the only marijuana stock that's worth buying right now? I don't think so -- at least not for aggressive investors.
The European cannabis and cannabidiol (CBD) market is also really important. Aurora Cannabis arguably is best-positioned to be the leader in that growing market. Aurora also tops the industry in production capacity.
There are also quite a few U.S. cannabis stocks that are more attractively valued than Canopy Growth is. Innovative Industrial Properties, for example, trades at less than 30 times expected earnings -- a virtual bargain-basement valuation for marijuana stocks. The cannabis-focused real estate investment trust (REIT) even pays a nice dividend to boot.
Most marijuana stocks probably aren't great picks for investors right now. I agree with Stifel's Andrew Carter that Canopy Growth is an exception. But there are other exceptions, too.