Problems abound for popular pot stock Aurora Cannabis (ACB 12.87%). Poor financial results, an ugly balance sheet, and share dilution problems have chased investors away in 2020. Consequently, Aurora Cannabis's stock has plunged almost 90% over the past year.
The S&P 500 is up 20% over the same period, and on the whole, many pot stocks have taken this year's market volatility in stride. Consumer demand for cannabis is rising, and it is becoming more evident that cannabis is evolving into a staple good in licit markets. But there are few reasons to believe that Aurora Cannabis can make a comeback and turn a profit from cannabis' new normal. Fortunately, several marijuana companies present better prospects. Let's discuss two of them and discover why they are worth investor attention.
1. Cresco Labs is one of the largest vertically integrated pot companies in the U.S.
The U.S. federal government isn't a friend of the pot industry. Marijuana remains a Schedule 1 drug in the U.S., meaning it has no recognized medical benefits, a high potential for abuse, and a high potential for dependence, according to the Drug Enforcement Agency (DEA). Meanwhile, 33 states and the District of Columbia have legalized medical uses of marijuana, and 11 have legalized adult recreational use of the substance. The cannabis industry is booming in some parts of the U.S., and one of the best companies that's been cashing in on the market opportunity is Cresco Labs (CRLBF -4.11%).
This vertically integrated cannabis company has a presence in nine states, but two in particular are worth mentioning. First, nine of 19 dispensaries Cresco Labs currently operates are located in Illinois, where the recreational use of pot has been legal only since Jan. 1, 2020. Cresco Labs currently controls a leading market share in Illinois, which boasts an annual run rate of $1 billion in cannabis sales. During the company's second-quarter earnings conference call, CEO Charlie Bachtell said that "Illinois is set to issue its next 75 retail licenses, a catalyst to more consumer demand and increase opportunities for our wholesale business."
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Second, thanks to its Jan. 8 acquisition of Origin House in a cash and stock transaction valued at $428.2 million, Cresco Labs has a strong presence in California, the largest cannabis market in the world. The deal gave Cresco Labs access to more than 575 dispensaries in the Golden State.
Cresco Labs continues to record strong financial results. During its second quarter that ended on June 30, the company reported revenue of $94.3 million, a 42% sequential growth and a 215% year-over-year growth. The company did record a net loss of $4.7 million, which was better than the $13.4 million net loss it recorded during the first quarter, but slightly worse than the $4 million loss reported during the year-ago period. Still, with the pot industry growing fast in the U.S., expect Cresco Labs' top and bottom lines to improve as the company continues to leverage its strong position and expand its market footprints. Investors who purchase shares of this cannabis stock today probably won't regret it in a few years.
2. Aphria is a top player in the Canadian cannabis market
Here are two quick reasons why Aphria (APHA) is one of the top Canadian cannabis stocks. First, the company is one of the leaders in its domestic market. Second, Aphria has a strong presence in Germany, one of the top cannabis markets outside North America. Let's unpack both of these pros.
During its latest reported quarter ended May 31 -- Aphria continued to gain market share in Canada. Among legally licensed cannabis companies in Ontario (Canada's largest province by population), Aphria's market share grew to 16.1%, up from 13% during the prior quarter in terms of total sales. Over the past nine months, Aphria's market share has doubled in this province.
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Of note, much of the attention following Aphria's latest quarterly update focused on its bottom line. The company recorded a net loss of 98.8 million Canadian dollars. However, this massive loss was due to non-cash charges. Aphria incurred a CA$64 million impairment charge and another separate CA$27 million non-cash expense. The impairment charge was related to Aphria's international assets, which were harmed by the pandemic. The other non-cash expense stemmed from the revaluation of convertible debentures. Meanwhile, Aphria's total revenue for the quarter was CA$152.2 million, 18.4% higher than the prior-year quarter. The company has posted positive adjusted EBITDA in five consecutive quarters, a rare feat among its Canadian peers.
Second, Aphria's Germany-based subsidiary CC Pharma continues to have a major effect on its top line. The company's revenue from CC Pharma during its fourth quarter was CA$97.1 million, a slight decrease from the CA$99.2 million it recorded during the year-ago period.
Both of Aphria's most important markets -- Canada and Germany -- will continue to grow at a good clip in the coming years, and the company is well-positioned to post profits. In Canada, Aphria's efforts in the year-old cannabis derivatives market could bear fruits. The company is focusing on the vaping segment, in which it currrently holds the top sales position. These factors will help Aphria's revenue and earnings growth in the coming years, and in my view, the company should be able to outperform the market in the long run.
