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3 Cannabis Stocks to Watch in November

By Mark Prvulovic - Nov 1, 2019 at 10:15AM

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Investors should keep an eye on these promising pot producers.

Cannabis stocks as a group have had a difficult year, with most companies shedding a significant chunk of their market value. Although some investors were hoping that Canada's cannabis 2.0 legalization would help spur the market forward, the cannabis sector hasn't fulfilled those hopes. Instead, investor sentiment surrounding cannabis stocks has changed. The speculative excitement surrounding the industry in 2018 has dissipated as investors have grown more bearish about the market, at least in the short term.

At the same time, the ongoing vaping crisis has hurt cannabis sentiments as well. As the number of vaping-linked deaths continues to increase, over 50 different health and advocacy organizations have come together to pressure the Trump administration to ban vaping flavors altogether. Now with some states planning to ban vaping outright, cannabis stocks -- especially U.S. multi-state-operators -- could end up taking a financial hit if the ban spreads to more states and people become more wary of vaping.

However, with the prices of cannabis stocks reaching historic lows, many companies are selling at bargain-bin prices. Investors can find plenty of good deals in today's cannabis market, whether they are looking for underpriced stocks or smaller, high-growth producers with strong financials. Here are three cannabis stocks that investors should keep an eye out for in the month of November.

Dried cannabis flower on a table beside a vape pen.

Image source: Getty Images.

1. Aurora Cannabis

The only large-cap cannabis stock on this list, Aurora Cannabis ( ACB -5.21% ), made a major mistake by offering an early, unaudited guidance target for investors ahead of its fiscal Q4 financial results. Aurora promised shareholders that it would see a profit in the upcoming quarter, so investors were shocked when the company ended up failing to meet its promise. When Aurora later said it wouldn't expect to be profitable until 2020, the resulting investor disappointment led to a major sell-off in the stock.

However, the reason Aurora made its early unaudited guidance announcement was to quiet the growing clamor from investors for profitability from large-cap cannabis companies. While caving into this investor pressure was clearly an error in hindsight, in the long run, it might not be as big a deal as investors first made it out to be.

Besides its reputation as an industry leader and its dominant position in international markets, there are some signs of optimism for the company. Most significantly, now that Canada has legalized products derived from cannabidiol (CBD), Aurora is also expanding into the realm of higher-margin products such as concentrates, vapes, and edibles, something that should help the company's bottom line.

However, there are reasons to be worried as well. Short interest in the stock has been surging recently. Supply chain bottlenecks from the Canadian provincial distributors and their dispensaries have hamstrung demand, while Aurora continues to focus on increasing its cultivation capacity. With Canada potentially reaching a situation in the next few months in which it could see an oversupply of unsold cannabis, some investors are worried that the company could be hurt by plummeting prices and an inability to sell a growing stockpile of products.

No matter which way Aurora moves in the upcoming weeks and months, it is definitely a cannabis stock that investors should watch out for, even if for no other reason then to gauge the overall direction of the industry.

2. Village Farms International

Village Farms International ( VFF -2.68% ) is a unique cannabis small-cap stock for a few reasons. The company used to operate as a struggling vegetable grower but has been slowly shifting into the cannabis space. While the company has a unique story, what makes it an impressive producer is just how efficiently it can leverage its vegetable-growing experience in this new arena. Its signature cultivation facility, a joint venture with Emerald Health Therapeutics called Pure Sunfarms, has quickly earned a reputation as a highly efficient, low-cost, high-profit facility. With the Pure Sunfarms greenhouse on track to double its output from 75,000 kg per year to 150,000 kg per year, Village Farms' high-margin cannabis business is quickly on track to surpass its legacy, low-profit produce business.

The company reported an impressive all-in-growing cost of just $0.49 per gram with an earnings margin of 78%. On average, Village Farms' average selling price is $3 per gram, and while this might seem low compared to other producers, the company made the strategic decision to sell mainly to other cannabis companies rather than to the Canadian provinces themselves, hence the lower pricing. In exchange, Village Farms has a greater variety of potential buyers, including those in the U.S., and it can navigate more easily around the demand-side supply issues hurting other major producers.

Now that cannabis companies are trying to expand into higher-margin CBD-derivative products, Village Farms is well poised to expand in this climate. The company also grows its own high-quality hemp biomass and CBD oil for the wholesale market, and demand is expected to increase following Canada's 2.0 legalization. Overall, Village Farms is an extremely efficient small-cap cannabis producer that is nimble enough to avoid some of the problems facing other companies.

3. Aphria

While Aphria ( APHA ) lost most of its market value over the past few months, pushing the company down from a large-cap to a mid-cap cannabis stock, it still has an incredibly powerful advantage over its rivals. Simply put, Aphria is profitable. In an industry where most companies are postponing profitability -- to the irritation of investors -- Aphria is one of the few companies that has seen have positive earnings.

Unlike the majority of cannabis cultivators, which will likely need to raise more funding in the future to maintain their growth rate, Aphria's profitability means that it won't have to dilute its existing shares in further fundraising rounds. Despite this fact, which should be a major selling point, Aphria is trading at remarkably low financial metrics. The company is trading at just 2.7 times its enterprise value to revenue (EV/R), whereas Aurora, Canopy Growth, and HEXO are trading at 10.5, 14.7, and 12.6 times EV/R, respectively.

What this means is that Aphria is a bargain at its current stock price. This isn't surprising since the company was hit by a nasty scandal in late 2018/early 2019 regarding its Central and Latin American acquisitions. While Aphria ended up recovering from the ordeal in time, its image still remains somewhat tarnished from the scandal.

However, the entire affair had nothing to do with Aphria's Canadian operations, which are known as being extremely cost-efficient and constitute the bulk of the company's assets. With a production cost of $1.43 per gram, Aphria remains one of the most efficient large-scale producers of cannabis on the market, and its strong financial performance is a testament to this fact.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
$5.82 (-5.21%) $0.32
Village Farms International, Inc. Stock Quote
Village Farms International, Inc.
$6.18 (-2.68%) $0.17
Aphria Stock Quote
Canopy Growth Stock Quote
Canopy Growth
$9.99 (-3.57%) $0.37
Emerald Health Therapeutics, Inc. Stock Quote
Emerald Health Therapeutics, Inc.
$0.06 (-5.17%) $0.00
HEXO Stock Quote
$0.94 (-6.30%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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