Marijuana stocks have taken investors for a wild ride in 2019. When the first quarter came to a close, more than a dozen of the most popular pot stocks had gained at least 70%, and the expectation was that numerous cannabis stocks would be pushing toward profitability by year's end.
However, now that we're just weeks from the end of 2019, most marijuana stocks are at or near multiyear lows, with many losing at least half of their value since March or April. A combination of supply issues in Canada and high tax rates in the U.S. have kept the green rush from taking off.
What this volatility hasn't done, though, is keep millennials from investing in cannabis stocks. According to online investing app Robinhood, five marijuana stocks are among its 50 most-held companies. This is notable because the average age of Robinhood's more than 6 million members is 32, meaning it's an excellent representation of what's catching the attention of millennial investors. Listed in descending order, here are millennials' favorite cannabis stocks.
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1. Aurora Cannabis
To say that millennial investors love Aurora Cannabis (ACB 1.75%) would be an understatement. Not only is it the most-held stock on Robinhood, but it's not even close. As of this past weekend, 572,428 investors owned shares of Aurora Cannabis, compared to 314,441 who held Ford, the second most-held stock on the app. Put in another context, almost 1 in 10 Robinhood members owns a stake in Aurora Cannabis.
Why Aurora? Aside from its psychologically low share price of $2.42, which may be attracting investors, it's projected to be the production leader in Canada and has a larger geographic presence than any other cannabis stock. If Aurora were to bring all 15 cultivation facilities to full production, it could likely yield close to 700,000 kilos a year. This would, presumably, make it a logical choice to land lucrative long-term supply deals, as well as export to many of the 24 foreign countries it currently operates in.
On the downside, Aurora Cannabis is lugging around an unsightly $3.17 billion Canadian in goodwill following more than a dozen acquisitions since Aug. 2016. After witnessing a number of pending buyout deals get amended in recent months, it's become apparent that Aurora overpaid (by a lot) for its previous acquisitions. This makes it likely that the company's goodwill, which represents 57% of total assets, will result in a mammoth writedown in the foreseeable future. That's something for millennials to be wary of.
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2. Cronos Group
Cronos Group (CRON +0.73%) is the next most popular cannabis stock, and the ninth most held company on Robinhood.
The allure of Cronos Group primarily ties into its deal with Altria Group (MO +2.03%) that saw Altria take a $1.8 billion stake in the company. The deal, which closed in March, gave Cronos much needed capital that it can use to expand internationally and promote higher-margin derivative products, which are set to hit Canadian dispensary shelves in about a week. For Altria, it was a means of diversifying beyond tobacco sales, which have been challenging in the U.S. with adult cigarette smoking rates hitting an all-time low. The thesis here being that with plenty of cash and Altria in its corner, Cronos Group should be a winner.
However, Cronos has looked far from a success story, thus far. It's significantly trailed its comparably sized peers in the production department, and its initial derivative sales could struggle given the vape-related health scare in the U.S. that the Centers for Disease Control and Prevention believes may have been caused by vitamin E acetate as an additive. This implies that Cronos Group still has a lot of growing up to do before it delivers for investors.
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3. Canopy Growth
Maybe the biggest surprise is that the world's largest marijuana stock by market cap only ranks as the third most popular, according to Robinhood. Canopy Growth (CGC 2.68%) slots in directly behind Cronos as the 10th most-held stock on the platform, with 169,500 members owning a stake.
Canopy Growth's allure is some combination of its well-known brands, its top-tier production, its international reach, and its cash on hand. Whereas Aurora is tops in peak production potential and overseas presence, Canopy looks to be No. 2 in both categories. But unlike Aurora, Canopy Growth is swimming in cash following a $4 billion equity investment from Modelo and Corona beer maker Constellation Brands, which closed November 2018. Even after one heck of a spending spree, the company still has more than $2 billion in cash and short-term investments at its disposal, which provides the perception of downside protection.
Then again, no cannabis stock has been more prolific on the loss front than Canopy Growth. Even putting aside warrant extinguishment costs, Canopy's operating expenses have dwarfed its gross profits before fair-value adjustments, demonstrating just how far away from recurring profitability this company really is. In fact, Canopy's share-based compensation by itself was higher than its net sales in the fiscal second quarter. Suffice it to say that Canopy Growth may be one of the last pot stocks to produce a recurring operating profit.
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4. Aphria
A bit further down the list is Aphria (APHA +0.00%), which is the fourth most popular cannabis stock, and the 28th most-held company on the app, with 87,203 members owning a stake.
What continues to draw investors to Aphria is the company's ability to generate a bottom-line profit. Although Aphria is known as a marijuana stock, it generated three-quarters of its revenue in its most recent quarter from its pharmaceutical distribution subsidiary CC Pharma. While pharmaceutical distribution is a relative low-margin business, it provides some level of predictability that investors struggle to find in the cannabis space. When combined with favorable fair-value adjustments, Aphria has notched two consecutive quarters of profitability, and may wind up as a top-three cannabis grower (by peak production) when all is said and done.
Comparatively, the biggest knock against Aphria continues to be shareholder trust. If it appears to be valued more attractively than its peers, it may have to do with a conflict of interest discovered with its Latin American asset acquisition earlier this year that led longtime CEO Vic Neufeld to step down. Believe it or not, this was actually the second consecutive year that Aphria took heat for disclosures tied to a major acquisition. In sum, Aphria, like its predecessors on this list, still has a lot to prove.
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5. Tilray
Last, but not least, millennials gravitate toward Tilray (TLRY +0.00%). British Columbia-based Tilray is the fifth most popular stock on Robinhood, and ranks 50th overall among its most-held companies.
My guess is there are a handful of factors that make Tilray a popular attraction for millennials. For one, there's likely the memory of Tilray's incredible run from its $17 list price in July 2018 to $300 per share on an intraday basis two months later. The company is also one of the better-known medical marijuana brands in Canada, and it's the only other cannabis stock aside from Aurora and Canopy to have a presence in at least one dozen foreign countries. For Tilray, this overseas expansion is a mix between production and clinical research studies.
On the flipside, this is a company whose management team has all the makings of deer in the headlights. CEO Brendan Kennedy announced in March that Tilray would be focusing future investments on the U.S. and Europe, which was an odd move to make with Canada having just legalized recreational cannabis six months prior. Tilray has also been losing more money than Wall Street has been expecting, and it appears unlikely that it'll push into recurring profitability any time before 2022.
Long story short, cannabis stocks may be popular among millennials, but that popularity offers no guarantee of profitability.
