When a major player in a given industry performs really well, it can often set the stage for the shares of others in the same industry to rise also. This is called a sympathy play. And it just happened in the Canadian cannabis industry.
Last Friday, Canopy Growth (CGC -3.01%) announced fiscal 2020 third-quarter results that were much better than expected. The big Canadian cannabis producer delivered positive surprises in nearly every category. Its stock immediately jumped in the double-digit percentages and is still up 11% over the last three trading days.
But there are also other big winners. Here are three marijuana stocks that road Canopy's Q3 earnings coattails and just might rise even higher.
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1. HEXO
HEXO stock soared 18.9% on Friday after Canopy Growth's tremendous Q3 update. That was an even bigger jump than Canopy itself. HEXO's shares are still up 13% since last Thursday.
You might wonder why HEXO performed so well as a result of Canopy's news. After all, the business models of the two companies are quite different. HEXO's main market is Quebec, while Canopy claims a broader-based market across multiple provinces. Canopy is a key player in Germany's medical cannabis market, while HEXO isn't.
Probably the best answer to this question is that HEXO has been one of the biggest losers among marijuana stocks in recent months. It whiffed big time with its Q4 results, announced in October. Its management team lost a lot of credibility after promising that it would double its revenue from Q3 to Q4, then not coming close to achieving that prediction.
But sometimes the stocks that fall the hardest are the ones that bounce back the most when there's positive news. Canopy's Q3 results brought a fresh air of optimism to investors who had become jaded about the cannabis industry. That optimism seems to have especially provided a boost to HEXO.
2. OrganiGram Holdings
Shares of OrganiGram (OGI -3.63%) are up more than 10% since the stock's close prior to Canopy Growth's Q3 update. Unlike HEXO, OrganiGram does have a clear connection with Canopy. The two companies inked a two-year supply and distribution agreement in 2018 for serving the adult-use recreational marijuana market in Newfoundland and Labrador.
But OrganiGram already had its own good news last month. The company announced fiscal 2020 first-quarter results that were much better than expected. It delivered quarter-over-quarter revenue growth of 55%, a lot higher than Canopy Growth achieved in its latest quarter. And unlike most of its peers (including Canopy Growth), OrganiGram reported positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
But the big bounce for OrganiGram following its Q1 update faded over the next few weeks. Canopy's Q3 results seem to have reminded investors about OrganiGram's appeal relative to most other Canadian marijuana stocks.
3. Valens
Valens (VLNS) is another company with a direct tie to Canopy Growth. The two companies signed a multiyear cannabis extraction deal in late 2018. Valens stock has jumped close to 11% since Canopy announced its quarterly results.
In some ways, though, Canopy's Q3 update could be viewed as less than positive for Valens. For one thing, Canopy CEO David Klein hinted that it could be months before the company launches its much-anticipated cannabis-infused beverages. Canopy initially planned a January launch for its first beverage products but delayed it to work out production scaling issues.
During Canopy's Q3 conference call, the company's management also seemed to take a cautious view about how quickly the Cannabis 2.0 derivatives market would ramp up. Again, though, the gist of Canopy's update was positive -- and that seems to have provided a spark for Valens.
Rising higher?
I think that all three of these stocks could rise even higher in 2020. My view is that OrganiGram and Valens have the best prospects, though.
The main problem for HEXO is that it's still losing a lot of money. Even with the company's major staff reductions, I'm not persuaded that HEXO is on a clear path to profitability.
It's a different story with OrganiGram and Valens. In my opinion, OrganiGram ranks as the best-run Canadian cannabis producer of all. Its management team focuses intently on the bottom line. As more retail stores open in Canada this year and as the Cannabis 2.0 market picks up momentum, I expect OrganiGram will be a big winner.
I also look for Valens to deliver strong returns as the Cannabis 2.0 market shifts into full gear. The company's customer base includes several leaders in the Canadian cannabis industry, including (as mentioned earlier) Canopy Growth, OrganiGram, HEXO, and Tilray.
My take is that if Canopy Growth has a good year in 2020, OrganiGram and Valens could potentially have great years.
