Marijuana Stocks to Watch in Early 2021
Both benefiting from mergers, Aphria and Canopy Growth still have to deal with legal uncertainty. By holding both Houses of Congress, President Biden now has the power to enact federal drug reform. If he follows through, these fast-growing Canadian cannabis stocks should reap the rewards.
Cannabis Market Consolidation
Riding the wave of legalization across the world and the US, it was not surprising to see the cannabis bubble in 2017 and 2018. As fundamental market analysis would tell you, when a popular commodity can suddenly be obtained without causing friction with the law, exuberant market sentiment prevails. Consequently, almost all marijuana companies received overpriced valuations leading to an eventual burst of the bubble.
With a more mature marijuana market settled within realistic expectations, we now have the luxury of picking cannabis companies with a proven track record and long-term viability, following their technical indicators. In the meantime, the marijuana market continues to expand. Moreover, we can clearly see the trend of marijuana becoming detached from political orientation.
Across both blue and red states, cannabis is heading for legalization to a varying degree. Sixteen states have already fully legalized it, while only six states still treat cannabis as an illegal substance. On that continuum between fully legal and fully illegal, some states resort to suspending prosecutions for minor marijuana possessions, as it recently happened in New Jersey.
2 Marijuana Stocks to Keep an Eye On
With such a positive legal future in mind, alongside a more mature market, watch out for these two cannabis stocks as they meet the growing demand.
1. Aphria (NASDAQ:APHA)
In the initial stages of any market development, many companies focus on growth instead of profit. Aphria is one of the rare cannabis operations that already makes a profit. After its merger with marijuana producer Tilray at the end of 2020, the Canadian Aphria has consolidated its position further as the world’s largest cannabis company.
With this “reverse acquisition” of Tilray, where existing Aphria shareholders will have access to 62% of Tilray stocks, the joined venture stands to generate $685 million in annual revenue. Even before the merger, Aphria’s stock price has increased by 130% during 2020. Overall, it achieved a 1.269% growth in a period of five years.
However, going beyond the recent merger jump, it bears noticing that its sales rise should have been higher – for Q2 2020, a 6.4% increase in North America compared to Europe’s 13.3% increase. Furthermore, Aphria’s gross margin – the lower the better – rose to 29.7% in Q2 compared to 27.3% for the prior quarter, which means it received less profits from increased sales.
With that caveat out of the way, Aphria still represents a magnet for investors, due to its 1st position and rare profit generation.
2. Canopy Growth (NASDAQ:CGC)
Also based in Canada, Canopy Growth follows a similar path as Aphria. Aiming to penetrate the large-and-growing US cannabis market, the company made a deal to acquire Acreage Holdings, already operating in multiple US states. With legal obstacles still on the way, CGC’s CEO David Klein expressed his confidence in a recent Bloomberg interview that the company will become a major player in the US market within a year.
Indeed, Biden’s presidency bumped all cannabis stocks in the belief he will initiate marijuana legalization on a federal level. Both President Biden and VP Harris issued positive statements regarding marijuana legalization during the campaign. Harris went further than even Biden by vowing to decriminalize marijuana, which aligns with the view of 68% of Americans.
With this promising outlook, Canopy Growth’s shares doubled in value in just the last half a year. However, this also means the company trades at 32 times its actual revenue – $102 million as of September 30, which represents a 74.95% increase year-over-year. Accordingly, you should take a cautious approach, waiting for both the price correction and CGC’s official entrance into the US market.
Many people tend to avoid marijuana because of the smoke inhalation issue. With ready-to-baked goods infused with THC available in stores, are you more likely to consume it? Let us know in the comments below.
Disclosure: Tim Fries has no positions in any of the stocks mentioned, and has no plans to initiate any positions within the 72 hours following the publishing of this article. This article expresses the opinions of Tim Fries. Tokenist Media LLC has no position in any of the stocks mentioned, and does not plan to initiate any positions within 72 hours of the publishing of this article. Please consult our website policy for more information.