Did you give up on marijuana stocks after their disastrous 2019? The industry benchmark, the Horizons Marijuana Life Sciences ETF, slumped 36% last year, compared to the S&P 500's increase of 29%. If you decided to hold on your shares despite the industrywide setbacks, you've been on a wild ride. The coronavirus pandemic helped cannabis sales surge as people started accepting it as a consumer staple product, but the benchmark ETF is still down 31% since Jan. 1.
Both Canada and the U.S. saw impressive sales numbers this summer. The Canadian market, which has always been challenged by the black market, saw legal cannabis sales surpass illicit sales for the first time in the second quarter. In the U.S., states including Illinois -- a rather new recreational pot market -- have broken sales records. Illinois saw a massive $431 million in total sales between Jan. 1, when legalization took effect, and September.
The U.S. cannabis stocks are among the best in the industry right now, with many sporting triple-digit revenue growth. Their Canadian counterparts are also catching up, barring a few that have miscalculated supply and demand. But there is one company that could bring life-changing returns if added to your portfolio now. Canada-based Canopy Growth (CGC -2.41%) might not currently be in the same space as its U.S. counterparts, but has a bright-looking future. Let's see why.
Canopy Growth might see clear skies soon
After being considered top cannabis picks for awhile, Canopy and its peer Aurora Cannabis (ACB 2.08%) had a disastrous 2019. Demand for cannabis pushed these companies to make some rash decisions, going too far too fast via aggressive expansion plans.
Adding to their troubles, regulatory challenges like licensing delays made it difficult for legal stores to open in Canada, and different cannabis laws in various provinces helped to keep both companies from achieving profitability. That said, 2020 has seen fewer challenges to the opening of legal stores.The province of Ontario granted its 100th store authorization in June, and Canopy opened 10 retail stores under its Tokyo Smoke and Tweed banners in the province of Alberta in September.
These factors could help Canopy grow its revenue numbers. In its first quarter, which ended June 30, revenue jumped 22% year over year to 110 million Canadian dollars, mostly thanks to medical pot sales in Canada and Germany. Canopy has yet to make a mark with its new recreational derivatives products. It has been working hard to ensure it offers consumers the best variety of innovative cannabis derivatives (vapes, edibles, beverages, and more), which Canada legalized as a part of "Cannabis 2.0" legislation in October of 2019. So far, it has few offerings available on the market, but those that are have garnered positive reviews. The company's new derivative products also made a 13% contribution to total Canadian business-to-business sales in Q1.
Despite its revenue gains, Canopy hasn't yet been able to hit positive earnings before income, tax, depreciation, and amortization (EBITDA), an important measure of a company's operating performance. Rising operating expenses have resulted in EBITDA losses for the quarter of CA$92 million, compared with CA$93 million in the year-ago quarter.
With that said, as the regulatory and licensing challenges improve in Canada and the company's sales from derivatives products grow, Canopy could see things turn around sooner.
Canopy Growth is on track for success
Aphria (APHA), which has a lower market cap ($1.2 billion) than Canopy ($6.8 billion), boasts the highest revenue growth in the industry right now. However, Canopy still has an edge with its higher medical pot sales and its new recreational derivatives products. Canopy was an early mover in the industry, which boosted its medical cannabis business in Canada. In fiscal 2020, the company's medical marijuana revenue came in at CA$56.8 million, while Aphria's medical revenue was CA$37.4 million, most of which came in from its German subsidiary, CC Pharma.
Canopy can draw in higher revenue from its recreational business not only in Canada but also in the U.S. Its partnership with beverage giant Constellation Brands (STZ -0.02%) will come in handy for this. The maker of well-known beers like Corona and Modelo, Constellation can help Canopy market its cannabis beverages in the U.S. The two companies entered into a strategic partnership in 2017, with Constellation investing CA$245 million in Canopy. It has been increasing its stake in Canopy since then, a sign of faith in Canopy's potential and of its the hopes that the cannabis industry is yet to reach its full capacity. Constellation currently holds a 38% stake in the company.
Canopy can also utilize its strategic acquisition of U.S. hemp company Acreage Holdings (which will be finalized if or when the U.S. legalizes marijuana at the federal level) to strengthen its footing across the border.
This marijuana stock could bring you long-term gains
Investing in an evolving industry like cannabis requires patience and a stomach for risk. As new U.S. states vote to legalize cannabis, Canopy could sail to great heights. Furthermore, Canopy has a new CEO who understands the value of controlling operating expenses: former Constellation CFO David Klein. He took over the reins at Canopy in January, and has since announced various cost-cutting measures. These changes are expected to reduce the company's selling, general, and administrative (SG&A) expenses, and bring it closer to achieving profitability.
Shares of Canopy are about flat so far this year, while Aphria is up 5%. Aurora Cannabis' stock has been hit the hardest, sinking 76%, worse than the Horizons Marijuana Life Sciences ETF's fall of 31%.
New Jersey, Mississippi, South Dakota, Arizona, and Montana all passed versions of marijuana legalization on their November ballots, and with federal legalization expected by 2022, Canopy should rise to great heights. A strong new leadership team, innovative products, slow but growing revenues, and a stable financial partner are factors that make Canopy an attractive investment today. This is the right cannabis stock for new and seasoned investors eyeing life-changing long-term returns.