Cannabis stocks have been on fire since the November election. The Horizons Marijuana Life Sciences ETF is up more than 45% since the start of last month, significantly outperforming the S&P 500, which is up just 13% during that time. Pot investors are more bullish on the future of the industry after four new states legalized marijuana for recreational use: Arizona, Montana, New Jersey, and South Dakota.
Investors are also bullish on Joe Biden, the Democrat who won the presidential election and who has expressed a more favorable view on marijuana than President Donald Trump. While full legalization may not be in the cards under a Biden Administration, the President-elect supports federal decriminalization.
All this positive news has made many pot stocks hot buys again. Even stocks of Canadian cannabis giants Canopy Growth (CGC 10.36%) and Aurora Cannabis (ACB 1.80%) got big boosts, rising 51% and 154%, respectively, since November. The two rivals are both eyeing the U.S. market and chomping at the bit for marijuana to become legal at the federal level so they can tap into the lucrative opportunities. Let's take a closer look at which stock is in a better position to enter the U.S. and which one is the better buy right now.
Canopy Growth's big advantage: Partnerships
Ontario-based Canopy Growth has a big advantage over many of its peers because if it needed to enter the U.S. market, it wouldn't be starting from square one. Alcohol giant Constellation Brands (STZ 0.61%) has a 38.6% stake in the Canadian pot producer, which can not just aid Canopy Growth from a financial and distribution perspective, but has also allowed the two companies to collaborate on beverages.
Canopy Growth also entered into a tentative agreement to acquire Acreage Holdings in 2019. The deal cannot be completed until marijuana is federally legal in the U.S., but if and when that happens, it would instantly give Canopy Growth a presence in 15 states.
That's why the Canadian cannabis company is in an excellent position to enter the U.S. marijuana market once it's legal to do so. For investors, it remains a waiting game as it's unclear if and when legalization may take place, but Canopy Growth looks like it could be among the biggest benefactors of full federal legalization. With a couple of great partnerships to facilitate its growth south of the border, it could quickly become one of the bigger names in the U.S. pot industry.
Until that happens, however, the company will need to focus on its existing operations. On Nov. 9, Canopy Growth released its second-quarter results for the period ending Sep. 30, posting record sales of 135.3 million Canadian dollars. However, profitability remains a challenge as the company reported a loss of CA$96.6 million. The company has been in the red in each of the past four quarters.
Without its prospects for the U.S. market, Canopy Growth wouldn't be as attractive of an investment as it is today.
Do cash issues hinder Aurora's potential growth?
Aurora doesn't have a big-name backer that it can rely on for help. Even billionaire investor Nelson Peltz wasn't able to help broker a deal for the cannabis company as an advisor. In May, it conducted a 12-for-1 reverse stock split to save itself from being delisted from the NYSE after consistently trading under $1.
But Aurora is also eyeing the U.S. market, and in the spring, it acquired hemp company Reliva, which operates in the U.S. Hemp is already legal federally in the U.S. and while the acquisition could potentially help Aurora's eventual move into American markets, it's not a multistate operator like Acreage, which gives Canopy the upper hand in that respect. And while hemp is a great way to enter the U.S., investors should know how much bigger the legal marijuana market is. By 2024, analysts project that the retail cannabidiol hemp market will be worth up to $11.3 billion. The legal U.S. cannabis market, however, is on track to be worth $35 billion by 2025.
The bigger problem for Aurora is that it needs to be self-sufficient, and it's struggling to do that right now. In the three months ending Sep. 30, the company burned through CA$108.5 million -- which is up from CA$94.9 million a year ago. In order to support its cash balance, the company issued shares which brought in CA$114.3 million during the period. For investors, that's a concern because if the company continually needs to issue shares, that's going to dilute their ownership and drive down the stock price. Despite the recent rally, Aurora's stock is still down 60% this year, while the Horizons Marijuana Life Sciences ETF is up 2%, and Canopy Growth's value has risen by 35%.
If Aurora pursues an aggressive growth strategy in the U.S. should that market open up, it would increase its need for cash and exacerbate an already challenging financial situation.
Canopy is the better stock, both now and in the future
These two cannabis companies were once fierce rivals, and it used to be unclear which one would dominate the industry. Today, the picture is much clearer as the partnerships that Canopy Growth has in place have put the company in a much stronger position. Constellation has invested too much into Canopy Growth to not support it if it needs help, which gives the pot stock a lot more stability than its rival. And with Acreage, it's ready to move into the U.S. market at a moment's notice. Aurora, meanwhile, has to significantly improve its financials not only so it can stop relying on new share issues to raise money, but to be able to fund new growth initiatives, such as U.S. expansion.
Canopy Growth is the safer buy today, and it's also in a better position to grow over many years. Investors who buy shares should plan to hold on for the long-run.