The major volatility in cannabis stocks, with some falling in recent weeks, may present an ideal opportunity for investors to buy on the dip. Five stocks positioned to outperform include Aurora Cannabis Inc. (ACB), Canopy Growth Corp. (CGC), HEXO Corp. (HEXO), Charlotte’s Web Holdings Inc. (CWBHF) and Tilray Inc. (TLRY), according to several analysts.
While marijuana industry-related stocks have soared in 2019, with the ETFMG Alternative Harvest ETF (MJ) and the Horizons Marijuana Life Sciences Index ETF (HMMJ), up 44.4% and 53.2% respectively YTD, versus the S&P 500’s 17.4% return, many individual cannabis stocks have fallen recently due to a myriad of concerns. Headwinds include broad industry uncertainty. Cannabis remains illegal at the U.S. federal level, and investors face uncertainty surrounding revenue outlooks, supply constraints and quality issues.
5 Top Marijuana Stocks
(Market Value in Billions)
- Aurora Cannabis Inc. $9.3B
- Canopy Growth $17.1B
- HEXO Corp. $1.6B
- Charlotte’s Web Holdings Inc. $1.8B
- Tilray Inc. $5.1B
All of these stocks have experienced wild swings in the past year. In recent weeks, Aurora Cannabis and Charlotte’s Web have pulled back, while Canopy Growth and HEXO have surged during the same period. Tilray spiked in November and January, only to see more declines this year.
Short-Term Issues to Resolve
Bank of America Merrill Lynch analyst Christopher Carey prefers Aurora Cannabis, Canopy Growth and Hexo, initiating coverage on all three with buy ratings in April, as cited by Barron’s. While the infrastructure of the marijuana industry hasn’t been quick enough to keep up with a rapid increase in demand on the back of legalization of the plant in Canada and other jurisdictions, Carey sees the issue as a temporary one.
“We think distribution channel constraints in Canada could prompt companies, namely larger ones with capital, to seek strategic actions in international jurisdictions, including potential for deals in the U.S. and Europe; indeed, the longer Canada channel issues persist, the more likely these actions become, in our view, a catalyst,” said Carey.
"Investors will use “this downturn as a buying opportunity as most are convinced that this sector remains a second half 2019- 2020 story." ~ Cowen & Co.
Cowen & Co.’s Andrew Stein echoed the upbeat sentiment on the marijuana industry for longer-term investors, as outlined in a story this month by Barron’s. For the short term, Stein says investors have been moderating their expectations, but it won't impede longer term gains. He highlights Tilray as an example, which has fallen more than 25% this year. Shares of the Canadian company have seen bullish trends recently as investors become more willing to add to their positions at a price near $50, per Barron’s.
It's important to note that since some cannabis stocks have risen significantly since these two analysts' reports, they now are less of a bargain.
Cannabis stocks are likely to face more market choppiness due to regulatory concerns and other risks, such as difficulty in meeting demand and quality standards. But those focused on the long-term growth opportunity of the budding industry are undeterred.Those willing to take on the risk may profit from a legal market expected to reach tens of billions of dollars globally.