Investors need a diversified portfolio, but not everyone has the tolerance for including risky, speculative stocks in the mix. But for those who do, the cannabis sector is one that has shaken off the initial exuberance that came with the legalization of recreational marijuana in Canada in 2018 and still offers interesting long-term opportunities.
Some companies are continuing to grow with the budding market, and others have overspent building infrastructure -- perhaps because they thought U.S. legalization would have arrived already. If you have $1,000 to invest in 2021 and still want to bet on the eventual federal legalization in the U.S., two stocks worth a look are Aphria ( APHA ) and EnWave ( NWVCF -0.10% ).
Strategizing for the future
Marijuana grower and distributor Aphria has been busy recently. In early November, it announced it would spend $300 million to buy U.S. craft brewer SweetWater Brewing Company. Not only will this acquisition be immediately accretive to earnings before interest, taxes, depreciation, and amortization (EBITDA) and diluted earnings per share, but there is also a clear cultural and product fit. In 2018, SweetWater released a hemp-strain IPA called 420 Strain G13, which earned the title of top craft brand in the U.S. in its first 12 months on the market.
SweetWater has a growing business. For the year ended Dec. 31, 2019, the company reported revenue of $67 million, adjusted EBITDA of $22 million, and a growth rate of twice the national craft beer market, according to the announcement. But Aphria's strategy isn't for short-term income here. It's for the growing U.S.-based market. SweetWater is currently available in 27 states plus the District of Columbia, and Aphria said that it provides "a platform and infrastructure within the U.S. to enable it to access the U.S. market more quickly in the event of federal legalization."
Aphria's next strategic move was to merge with fellow Canadian cannabis grower Tilray ( TLRY ). Aphria shareholders will own about 62% of the newly combined company, should it be finalized. It will continue under the Tilray name, but be led by Aphria chairman and CEO Irwin Simon. The combination will make it the largest current global cannabis company in terms of revenue.
These moves come at a time of growing sales, and a lower share price, as can be seen in this three-year chart.
Technology for the growers
EnWave offers growers a patented dehydration technology to replace freeze drying or air drying for a faster, high-quality drying process. This efficiency allows growers to increase production, which will increase sales when demand is sufficient.
The low temperature Radiant Energy Vacuum (REV) dehydration system is also used in food and pharmaceutical applications. So EnWave isn't completely counting on the cannabis industry for revenue, but the most dramatic investment thesis for this small-cap company depends on it.
EnWave's current business is dominated by its NutraDried Moon Cheese dried-cheese snack product, which can be ordered online or found in retail grocery chains. NutraDried sales represented more than 80% of revenue in the last two quarters.
The company signed 10 new royalty-bearing license agreements and sold 11 10-kilowatt (kW) REV machines in 2020. It also offers larger 60kW and 100kW machines. For investors, now is the time to look at EnWave, as it appears to be at an inflection point in its growth. In its latest earnings release, EnWave management said: "Our strategies have shifted away from preservation and we have returned to aggressively pursuing growth."
Speculation as an investment
Some investors who have $1,000 to invest in 2021 don't want to speculate, and shouldn't. But if you have the risk tolerance, and are able to risk that money, these two cannabis stocks seem to be at a good place in their life cycles to invest.
Speculation implies a chance of seeing outsized gains, with the risk of a total capital loss. That type of investment isn't for everyone. Besides, federal legalization of marijuana in the U.S. will be the key to seeing both of these companies soar. And there's no guarantee of that, even if the Senate tips in Democrat's favor after Georgia run-off elections today.
Aphria and EnWave have businesses that will survive without that catalyst -- but to truly wring the full potential out of these stocks, investors must accept that there is political risk that might either take a long time to pan out, or may not pan out at all. But that's part of what high-risk investments entail.