2019 was an interesting year for the Canadian cannabis industry.
The first few months were excellent for the Canadian marijuana stocks as investors remained bullish. Retail stores were reporting off-the-chart demand and producers couldn’t keep up. Everyone was talking about how marijuana would take over the world.
But then, reality hit.
Many different factors hit the sector hard. Analysts changed their tune and predicted the supply shortage would become a surplus. Many of the top producers were expected to at least approach profitability in 2019, but many prominent ones missed expectations. And perhaps most importantly, investor sentiment went away.
These reasons combined to send pot stocks reeling, with the sector ending 2019 down more than 50% compared to highs set in the spring. Much like Canadian oil and gas stocks, the sector is in an extreme bear market.
What does the next phase of Canada’s marijuana market look like? And most importantly, is there any upside left on these beaten-up Canadian stocks, or will they turn into investing zombies, securities that aren’t quite dead but certainly aren’t alive?
Investors could very well see some significant recoveries in 2020, especially if sentiment shifts. That’s very possible, especially as more consumers ditch their dealer and if cannabis edibles take off.
Before we get into the top marijuana stocks in Canada, let’s go over some things that make the industry so promising.
If you want boring, the Canadian marijuana sector isn’t for you. It’s a volatile place to invest.
That’s because a lot of people who are purchasing these stocks are buying them purely on hype, and possibly ignoring the fundamentals and the strengths of the companies themselves.
These investors often trade in and out frequently, which creates big moves daily. Even now, pot stocks are often responsible for the largest volumes on the Toronto Stock Exchange.
As always, when purchasing Canadian marijuana stocks, it is crucial to do your due diligence. You’ll want to be careful and proceed only with cash you can afford to lose. Other wealth protection methods – like using stop losses – might be a good idea as well.
Why marijuana stocks?
The pot rush can be explained in one word: legalization. Governments across the world are introducing legislation to legalize the recreational use of marijuana. In Canada, one of the key platforms that the current Liberal government ran on was the legalization of marijuana.
On April 20, 2016, also known as 420-day for pot enthusiasts, the Government of Canada officially announced plans to legalize marijuana. Despite opposition, the legalization took place in October 2018.
The government has subsequently made marijuana-based food and drink items legal, which should be a major growth market for the sector in 2020.
What to look for?
It’s all about production and revenue growth. The majority of marijuana companies still aren’t profitable, as such relying on traditional valuation metrics doesn’t make sense. Investors should pay close attention to these factors:
- Sales growth – Is the company meeting sales estimates? Or are they consistently coming up short? Even after the big sell-off, most of these stocks still trade at high price-to-sales ratios. As such, it is essential if the company can grow in line with expectations
- Production growth – Is the company achieving its expected production growth? Does it have a sustainable and realistic growth plan? How has it raised capital to expand operations?
- Partnerships – Does the company have any beverage or other types of partnerships? How many recreational marijuana agreements has it signed?
- Margins – Is it a low-cost producer? Is the average sale price per gram stable, declining or growing?
- Profitability – I know, we mentioned that profitability is not essential. However, if the company is profitable, it is a huge bonus and an encouraging sign.
- Balance sheet – Does the company have enough capital to hit its expansion goals? Will it need to raise more money by selling stock, diluting existing shareholders in the process?
So where should you start? Here are the top 8 marijuana stocks in Canada
8. Aurora Cannabis Corporation (TSX:ACB)
Dropping to last on our list of top Canadian marijuana stocks is Aurora Cannabis (TSX:ACB). Aurora, with a market cap of $2.35 billion, is also a well-known player in Canada’s medical marijuana industry. It also supplies product to the recreational market and has a strong position in CBD oil.
The company has been the most aggressive consolidator in the industry. As such, it now has one of the highest production capacities and is well positioned to meet demand.
The only downside to its buying spree is that the company has been issuing shares to make these purchases. As such, it has had the net effect of shareholder dilution. This has been a big factor in the stock’s 70%+ decline in the last year, but the general sentiment surrounding the industry sure hasn’t helped either.
Aurora boasts plenty of low-cost production, with the average cost to produce one gram of pot recently falling to $0.85. It currently has 11 different production facilities, including assets in Europe and South America, and is exporting product to dozens of different nations.
The only real issue with Aurora shares is the company isn’t projected to be profitable until 2022 at the earliest. Aurora is struggling mightily, but the cannabis stock has fallen to price levels not seen since late 2016.
Those who purchased in the low to mid double digits may never see their initial investment, but there is no doubt the company is attractive at these price levels, which is why we’ve decided to keep it on the list.
Mkt Cap: $2.35 Billion
YTD Gains: -21.7%
Fwd P/E: -13.87
1Yr Price Target: $6.98
7. Cronos Group (TSX:CRON)
Cronos Group Inc (TSX:CRON) provides an interesting investment opportunity for those looking to purchase Canadian marijuana companies.
Although Cronos produces its own marijuana, it primarily looks to invest in companies that are either licensed or actively seeking a license to produce medicinal marijuana.
The Canadian cannabis company currently has a very diverse portfolio, including both medicinal and recreational cannabis producers. Here are a few, but not all:
Peace Naturals, a medicinal marijuana company founded in 2013, was the first non-incumbent company in Canada to be granted a medical marijuana license by Health Canada.
Cove, a cannabis producer from the Okanagan Valley in British Columbia Canada, takes on a very unique production process to produce high grade recreational cannabis.
Lord Jones formulates, manufactures and distributes hemp-derived CBD products in the United States.
Like most all Canadian weed stocks, Cronos has faced significant losses in terms of share price over the last year. Once trading near $30 a share, the company has fallen to prices of just over $9.13.
However, this recent fall has left investors looking to buy pot stocks with a stronger opportunity.
Analysts have placed a 1 year target price on Cronos of $16.89, which signals nearly 85% upside from today’s price levels. With a debt to equity ratio of only 0.49 and a current ratio of over 3, Crono’s balance sheet is healthy, and is in a better position to expand than most cannabis companies here in Canada.
Mkt Cap: $3.05 Billion
YTD Gains: -10%
Fwd P/E: -110
1Yr Price Target: $16.89
6. OrganiGram (TSX:OGI)
Admittedly, outside of the big three marijuana stocks, it is difficult to predict which other companies will have long-term staying power.
The reason for making Organigram’s (TSX:OGI) inclusion on our list of the top marijuana stocks over the others is simple, it is one of the cheapest pot stocks on the index. It has a low price-to-forward sales ratio and the company has recently posted impressive revenue growth, a trend that should continue through 2020.
The company signed a 2-year deal in its home province of New Brunswick to supply cannabis to the recreational market there. This adds further growth potential to its current medical license. In addition to NB, it has supply agreements with Alberta, Manitoba, Ontario and PEI.
On top of supplying dried cannabis and oil products, through its exclusive agreement with TGS Colorado, the company is well positioned to take advantage of recreational edible products, which have rapid growth potential. It has also entered the cannabis vape market and plans further products in that part of the sector in 2020.
Analysts are bullish on the stock, with an average price target of just under $8 per share. That represents more than 100% upside as of this writing.
Mkt Cap: $504 Million
YTD Gains: 0%
Fwd P/E: 19.28
1Yr Price Target: $7.98
5. Aphria Inc (TSX:APHA)
Aphria Inc. (TSX:APHA) rounds up the ‘big 3’ top cannabis stocks on the Toronto exchanges. Aphria has posted several consecutive quarters of profitability, at least on an adjusted EBITDA basis.
Unfortunately, Aphria shares have been some of the hardest hit in the recent pot stock rout. Management just can’t seem to meet expectations. In fact, in January, the company announced it would miss expectations for 2020, telling investors to expect revenue between $575 and $625 million, compared to previous guidance of between $650 and $700 million.
Aphria has also been embroiled in several controversies as of late. It has been accused of paying a premium for acquisitions which had the net effect of lining insider pockets. Although none of these allegations have been proven, it has led to significant volatility in stock price. Because of these controversies, the company sacked its CEO and announced the co-founder would be stepping down from the board.
The good news is the company has a solid balance sheet and it appears to be on the cusp of major profitability. Its CFO recently publicly mused the idea of the company paying a dividend, something that would certainly separate this company from the pack.
If Aphria can put these controversies behind it and actually hit analyst expectations, the stock could go much higher in 2020.
Mkt Cap: $1.48 Billion
YTD Gains: -15%
Fwd P/E: 69.25
1Yr Price Target: $9.90
4. Charlotte’s Web (TSX:CWEB)
One of the newer additions to the space, Charlotte’s Web (TSX:CWEB) completed its IPO in late August of 2018. At the time, the company listed at $7.00 per share and had a quite an impressive run and peaked around $27.00 per share in March of 2019.
However, much like most if the industry Charlotte’s Web has been in a bear market ever since. Where Charlotte’s Web differs from most of the companies in this space is that it is focused on the production and distribution of hemp-based cannabidiol (CBD) wellness products.
In other words, this isn’t a medical or recreational marijuana stock. The company’s products include tinctures (liquid product), capsules, gummies and topical products. Recently, it also introduced a line of canine products for pets. Charlotte is the top CBD brand by market share and its products are available at over 9,000 retail locations.
The CBD industry is one of the fastest-growing and some of the lager marijuana companies such as Canopy Growth Crop (TSX:WEED) are also getting into the space. Although triple-digit revenue growth has subsided, the company is still growing revenue at high, double-digit clip.
Charlotte’s is also one of the few profitable stocks in the industry. Since 2016, it has consistently posted a profit and has increased gross margins. This is not a money-losing operation like most of its peers.
A big reason for this success has been the company’s vertically integrated supply chain. From production through to distribution, Charlottte’s Web has a proven management team that is less focused on hyper-growth and more focused on high quality, consistency and efficacy.
This CBD firm is well positioned moving into the future. It is leveraging is market-leading position and has show a penchant for introducing innovative products.
Mkt Cap: $909 Million
YTD Gains: -14%
Fwd P/E: N/A
1Yr Price Target: N/A
3. Canopy Growth Corporation (TSX:WEED)
Canopy Growth (TSX:WEED) is the largest Canadian weed stock in the country with a market cap of $8.91 billion and has built a reputation as the industry leader.
As such, its share price has been less volatile and far outperformed just about every other pot stock as investors punted these lesser companies from their portfolios. The company has similarly outperformed over the past two-year and five-year time frames.
Canopy’s growth profile is not limited to Canada as it has significant international operations. It has various supply and distribution agreements with Jamaican, Spanish, and Denmark governments.
These recent agreements add to its sector-leading expansion in Australia, Germany, Brazil, and Chile. It also has big plans to enter the hemp market in the United States, creating infrastructure in the nation that will be extremely valuable when marijuana finally gets legalized on a national basis.
You also can’t talk about Canopy without mentioning its industry-defining deal with Constellation Brands. It is the largest beverage deal in the sector and adds significant legitimacy to the company. In fact, if Canopy’s shares get too cheap, Constellation might just step in and buy more.
Simply put, Canopy is one of the safest plays in the sector and remains near the top of our list of cannabis stocks.
Mkt Cap: $8.86 Billion
YTD Gains: -3%
Fwd P/E: -20
1Yr Price Target: $46.75
2. Village Farms (TSX:VFF)
Village Farms (TSX:VFF) has been around for decades, but it has only recently gotten into the marijuana business. The company also grows produce – tomatoes, peppers, and so on – in greenhouses located just outside Vancouver and in Texas, and it has open-air fields in Mexico.
Once marijuana took the market by storm, Village Farms jumped onto the bandwagon. It converted more than 2.2 million square feet of greenhouse space to marijuana production, and in the span of just a few months became a major producer. It’s in the process of converting an additional 2.6 million square feet of greenhouse space to marijuana production (this should be done by the second quarter), and it is currently considering converting its Texas greenhouses into hemp production.
Village Farms’ marijuana production is already profitable, and it has the advantage of having a bunch of expert plant growers already on staff. And unlike every other pot producer, it didn’t have to spend millions building grow space. It just used greenhouses that have long been paid for.
And in a rarity for the sector, analysts expect the company to be solidly profitable in 2020. The bottom line is expected to be $0.64 per share, putting the stock at just 13x forward earnings.
Mkt Cap: $324 Million
YTD Gains: -21%
Fwd P/E: 9.83
1Yr Price Target: $34.33
1. MediPharm Labs Corp (TSX:LABS)
MediPharm Labs (TSX:LABS) uses state of the art technology to specialize in cannabis extraction and purification. The company previously traded on the TSX Venture Exchange but was up-listed to the TSX in July of 2019.
The company is the country’s leader in oil extraction and the singular and strategic focus is what sets it apart from others in the industry. The company is positioned to scale current production to 300,000 kg, up from 100,000 kg as of last update.
Outside of Canada, it is in the process of building a production facility in Australia with the intent to target the medical marijuana market. It also expects the new facility to be well-positioned to be an import-export hub to service the Asia-Pacific markets.
MediPharm was the first fully licenced extraction only company in Canada. This has enabled it to book contracts with several of the industry leaders such as Canopy Growth Corp, Cronos Group and Supreme Cannabis for the production of vapeables, edibles, softgels and bottle cannabis oil.
Since the company was up-listed in July, MediPharm has signed another handful of strategic agreements for the supply of cannabis extractions. Several of which have minimum commitments which provides the company with financial stability.
Did you know? Over the past twelve months, MediPharm Labs has generated the third most revenue in the industry? It is also one of the few cannabis stocks that has turned profitable with adjusted EBITDA margins between 23-25%.
The company is also well financed as it generates plenty of cash and has an undrawn line of credit.
This should enable MediPharm Labs to re-invest in the company without having to tap into the markets. Thanks to is market-leading technology, it is one of the best positioned to take advantage Canada’s licensing of edibles, beverage-infused drinks and topicals. Otherwise known as “Cannabis 2.0”.
Mkt Cap: $346 Million
YTD Gains: -33%
Fwd P/E: 22.08
1Yr Price Target: $5.53