What happened
Canadian pot stocks are getting a much-needed breather from their nearly yearlong downward trend today. In pre-market trading, Cronos Group (CRON 3.82%) was the biggest winner, with shares hitting a peak of 33% on heavy volume. And Aurora Cannabis (ACB 2.34%), Canopy Growth (CGC 5.44%), HEXO (HEXO +0.00%), OrganiGram Holdings (OGI 4.35%), and Tilray (TLRY +0.00%) all saw their shares jump by more than 3% in pre-market action on Thursday
So what
What's behind this sea of green? Today marks the official opening of Cannabis 2.0, which legalizes the sale of cannabis-infused beverages, edibles, concentrates, and topicals in Canada. That said, companies will still need to seek approval for their derivative cannabis products from Health Canada. As a result, consumers won't be able to legally buy these products until mid-December.
Image source: Getty Images.
What's the big deal? The market for edibles, beverages, and other alternative cannabis products is expected to balloon into a space worth 2.7 billion Canadian dollars ($2 billion), according to a report by Deloitte. That's great news for companies like Aurora, Canopy, Cronos, HEXO, OrganiGram, and Tilray.
Now what
Should investors buy any of these names today with the hope of turning a quick profit? While it might be tempting to bottom-feed on these beaten-down pot stocks this morning, there's a solid rationale to simply sit tight for the time being. It's highly unlikely that any of these companies will see an immediate boost to their top lines just from the official opening of Cannabis 2.0. The real financial benefit from the legalization of edibles probably won't become evident from an earnings standpoint until mid-2019 at the earliest.
In fact, investors might want to lower their expectations for the possible near-term financial impact from derivatives. The Canadian cannabis market doesn't even have enough brick-and-mortar locations to meet demand, and it could take a year or more for the full complement of derivative products to hit store shelves. Put simply, pot stocks are still a long-term play.
Are there any Canadian pot companies that should intrigue long-term investors in the wake of this seminal event? Although Canopy Growth and Cronos have by far the healthiest balance sheets due to their deep-pocketed equity partners, Aurora and OrganiGram are arguably the two best plays within the top- to mid-tier cannabis cultivators from a valuation and growth standpoint.
Aurora has more than enough production capacity to quickly ramp up its derivative product line over the coming year, and OrganiGram sports one of the more compelling derivative product portfolios with its unique cannabis-infused chocolates and nano-emulsification technology. Both of these companies should be able to carve out a profitable niche within the edible/alternative product segment over the coming year. Canopy and Cronos, by contrast, each sport sky-high valuations that imply that most, if not all, of the near-term impact from Cannabis 2.0 is already priced in at this point.
Which stocks should investors flat-out avoid? They will probably want to sidestep HEXO for the next few months, even though its joint venture with Molson Coors Brewing could give it an early edge in cannabis-infused drinks. HEXO needs to tighten up its internal controls in a big way. Until then, there's no real way to truly gauge the company's core value proposition.
