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3 Reasons Cannabis Stocks Are a Buy Right Now

By Keith Speights - Mar 24, 2020 at 6:03AM

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Despite getting hammered in recent weeks, cannabis stocks are better bets than you might think.

As bleak as things look in the stock market right now, the coronavirus-fueled stock market crash is presenting one of the best opportunities to buy stocks that you'll probably ever see. Some kinds of stocks are better options than others are, though.

You might think that cannabis stocks would be really low on the list to snatch up right now. After all, there was already a lot of speculation involved with investing in these stocks even before the coronavirus pandemic. But there are three solid reasons cannabis stocks are a buy right now.

Hand holding a small white bag with an image of a green cannabis leaf printed on the bag

Image source: Getty Images.

1. Demand remains strong

One important thing to keep in mind when checking out any stock to buy in these tumultuous times is the level of demand their products and services will have in the near term. The good news for many cannabis stocks is that demand appears to be resilient.

To be sure, social distancing, lockdowns, and quarantines are negatively impacting the retail market, in general, and that's spilling over to the cannabis industry. Canadian cannabis producers like Aurora Cannabis (ACB 7.75%) and Canopy Growth (CGC 4.72%) were already battling headwinds from the lack of enough retail cannabis stores in Ontario, Canada's most heavily populated province. The coronavirus pandemic is no doubt making these companies' retail problems even more pronounced.

However, throughout Canada and the U.S., reports are coming in indicating a surge in recreational marijuana sales. A lot of this buying likely stems from anxious consumers stocking up on pot in case they're unable to leave their homes in the near future. 

The good news for medical cannabis businesses is that many key states are classifying them as "essential" and entitled to remain open during a lockdown. Several states have also enacted measures to encourage home delivery of medical cannabis products. 

2. Valuations are dirt cheap

You'll run out fingers and toes counting the number of cannabis stocks that have plunged by 50% or more off their highs this year. Valuations of cannabis stocks are dirt cheap as a result of the coronavirus stock market crash.

Former high-flying Canadian marijuana stocks now boast reasonable price-to-sales multiples. That includes companies that have been managed quite well. Shares of Organigram (OGI 7.52%), for example, currently trade at close to 3.7 times trailing-12-month sales. 

Profitable cannabis-related businesses have also seen their valuations plummet. Innovative Industrial Properties' (IIPR 4.94%) market cap has been nearly halved from its February high mark. Its shares now trade at a little over 15 times expected earnings, much lower than in the past.

3. The long-term opportunity is still huge

I've saved the most important reason to buy cannabis stocks right now for last. Despite the current uncertainty, the long-term opportunity for the global cannabis industry is still huge.

In Canada, the Cannabis 2.0 market will create tremendous opportunities for cannabis derivatives products -- even if those opportunities take longer to fully blossom due to the COVID-19 outbreak. In the U.S., legal cannabis markets in states will continue to mature and expand. And more states will likely legalize medical cannabis and recreational marijuana.

It's hard to focus on the future when the present is very troubling. But that's exactly what successful investors should do. The crisis resulting from the coronavirus pandemic will only be temporary. Nothing about the health scare diminishes the prospects for the cannabis industry. The myopic perspective that many investors have presents a great opportunity for other investors with long-term perspectives.

A critical criterion

Cannabis stocks are a buy right now -- but not all of them. There's one critical criterion that should be considered in choosing which individual stocks to invest in. That criterion is financial strength.

Companies that aren't profitable and don't have an ample cash stockpile could have to raise cash in the coming months. There's no guarantee that stocks will recover that quickly. As a result, some cannabis companies could have to issue new shares at a horrible time when stock prices remain very low. Aurora Cannabis could be the poster child for this scenario.

The ideal cannabis stocks to buy will be both profitable and have plenty of cash. Innovative Industrial Properties is a top pick, in my view. It's consistently profitable. It has a reliable revenue stream from the properties it's leased to medical cannabis operators. And IIP had nearly $237 million in cash, cash equivalents, restricted cash, and investments at the end of 2019. Investing in only cannabis stocks that are financially strong like IIP should increase your chances of generating great long-term returns. 

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$3.77 (4.72%) $0.17
Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.53 (7.75%) $0.11
OrganiGram Holdings Stock Quote
OrganiGram Holdings
OGI
$1.06 (7.52%) $0.07
Innovative Industrial Properties Stock Quote
Innovative Industrial Properties
IIPR
$119.33 (4.94%) $5.62

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

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