The marijuana market is still at a nascent stage making it attractive to investors looking to derive exponential gains. Canada legalized marijuana for recreational use in October 2018 which drove Canadian pot stocks to record highs. However, in the last two and a half years, several cannabis stocks have grossly underperformed the broader markets due to a wide variety of structural issues.

These include the slower than expected rollout of retail stores in major Canadian provinces, competition from a thriving black market, overvalued acquisitions, and rising number of players. These factors led to lower product demand, high inventory levels, billion-dollar write-downs, and massive losses for marijuana producers.

Several cannabis producers in Canada have raised capital at an alarming rate diluting shareholder wealth in the process. The COVID-19 pandemic exacerbated these declines driving pot stocks to multi-year lows in 2020.

However, there is a good chance recreational use of cannabis will be decriminalized or even legalized south of the border and in other markets including Mexico and Europe. This will provide Canadian marijuana companies to gain traction in international markets by leveraging their expertise and existing infrastructure to drive top-line growth and benefit from economies of scale.

Keeping these factors in mind, let’s take a look to see which are the top Canadian marijuana stocks right now.

 

Tilray

In May 2021, Tilray and Aphria merged to form the largest Canadian cannabis company in terms of sales.  Tilray is valued at a market cap of $9.32 billion and the company is forecast to generate $562 million in sales this year. Further, Wall Street expects sales to rise to $862 million in 2022, allowing Tilray to improve its bottom-line from a loss of $1.69 per share in 2021 to a loss of $0.31 per share in 2022.

Last year, Aphria acquired U.S.-based craft beer manufacturer SweetWater Brewing. This buyout should help accelerate its entry into the cannabis-infused beverage segment in the U.S. Last October, Tilray also entered the cannabis derivatives vertical after it introduced a new line of edible products.

In the December quarter, Tilray reported a positive EBITDA for the first time while Aphria has been generating a positive operating margin for the last seven consecutive quarters. It suggests the combined entity should race towards profitability due to cost synergies within the next few months.

Aphria and Tilray have also established a presence in Europe where the cannabis market is forecast to touch US$37 billion by 2027, indicating an annual growth rate of 30%. Tilray has a licensed manufacturing facility in Portugal while Aphria’s CC Pharma subsidiary provides it with a sizable presence in Germany.

 

Canopy Growth

Another Canadian giant operating in the marijuana space is Canopy Growth, a stock valued at a market cap of $11.2 billion. While Canopy Growth stock has returned an astonishing 922% in the last five years, it’s down 61% from all-time highs.

In fiscal 2021 ended in March, Canopy Growth increased sales by 37% year over year to $546.6 million. This growth was driven by robust performance in its CBD oil and vape segments in the U.S. However, due to inventory impairments and asset write-downs, Canopy Growth’s gross margin fell by 9 percentage points in fiscal 2021.

Alternatively, Canopy Growth managed to improve its free cash flow loss by 57% to negative $630.2 million. Canopy Growth leads the recreational dried flower market in Canada and is the second-largest player in the country’s cannabis-infused beverage market after HEXO.

Canopy Growth is backed by Constellation Brands that owns a 38.4% stake in the company. This significant investment provides Canopy Growth with financial flexibility and liquidity to improve profit margins over time.

WEED stock ended fiscal 2021 with $2.3 billion in cash and $1.6 billion in long-term debt. It recently completed the acquisition of Supreme Cannabis which will make it the third-largest Canadian cannabis company in terms of sales. In the March quarter, Supreme Cannabis increased its sales by almost 40% year over year to $13.6 million and posted an adjusted EBITDA for the third consecutive quarter.

 

HEXO

Valued at a market cap of $1.03 billion, HEXO has established itself as one of the leading marijuana companies in Canada. HEXO is all set to increase its revenue at an accelerated pace given its recent acquisition spree.

In May, HEXO announced it would acquire Redecan for $925 million in a. cash and stock transaction. Redecan is the largest privately-held cannabis producer in Canada and leads the pre-rolled market and also has a portfolio of best-selling oils and capsules.

HEXO also announced the acquisition of 48North Cannabis in May for $50 million and expects the buyout to generate $12 million in synergies in the next year. 48North reported sales of $17 million in 2020 and in the March quarter, its sales almost doubled year over year to $5.2 million.

In February 2021, HEXO disclosed its intention to acquire Zenabis Global for $235 million which will provide the former with access to high growth markets in Europe.

The three acquisitions are valued at $1.2 billion which will make HEXO a dominant force in the Canadian marijuana market.

 

Village Farms

Village Farms produces, markets, and distributes greenhouse tomatoes, bell peppers, and cucumbers in North America. It operates via three segments that include produce business, energy business, and cannabis and hemp business.

Village Farms is a vegetable producer that has leveraged its expertise to produce cannabis. The company has increased its sales from $150 million in 2018 to $170 million in 2020. Analysts expect sales to grow by 48.5% to $252.3 million in 2021 and by 31% to $331 million in 2022. This growth in revenue will also help Village Farms improve its bottom line from a loss per share of $0.07 in 2020 to earnings per share of $0.23 in 2022.

It also means Village Farms stock is trading at a forward price to 2022 sales multiple of 3.03x which is extremely cheap compared to peers.

Village Farms grew revenue by 63% year over year to $52.1 million. Its cannabis sales stood at $17.4 million in Q1 accounting for a third of total sales. Village Farms acquired 100% of Pure Sunfarms which is the company’s cannabis arm. In 2020, Pure Sunfarms reported sales of $76 million and profits of almost $14 million.

 

Cronos Group

In the last five years, Cronos Group stock has gained a monstrous 4,700% in market value. However, it has also lost 68% in market value since early 2019, currently valuing it at a market cap of $3.65 billion.

In Q1 of 2021, Cronos Group sales were $12.6 million up 50% year over year. However, Bay Street forecast the company to post sales of $16.5 million in the March quarter. Its net loss widened to $161.6 million or $0.44 per share compared to analyst estimates of a loss of $0.08 per share. In the year-ago period, Cronos posted a net loss of $75.7 million or $0.20 per share.

It also reported an adjusted EBITDA loss of $37.1 million which was in line with the prior-year period. Cronos attributed its sales growth to strong demand for cannabis flower products which rose by 244% to $9.4 million while U.S. segment sales were up 12% at $2.4 million. This growth was offset by a 79% decline in the company’s extract sales.

Recently, Cronos announced an option to acquire a 10.5% stake in PharmaCann, a U.S.-based cannabis operator. The deal is valued at US$110.4 million and will provide Cronos an opportunity to enter the highly lucrative marijuana market in the U.S. once these products are legalized.

 

Aurora Cannabis

Another beaten-down marijuana stock that can make a comeback is Aurora Cannabis. Its one of the most popular cannabis stocks among investors and is currently valued at a market cap of $2 billion. Aurora Cannabis is down 95% from record highs as it continues to dilute shareholder wealth with regular equity capital raises.

In its fiscal third quarter of 2021 results ended in March, Aurora Cannabis reported a net loss from continuing operations of $165.7 million. Its revenue was down 25% year over year while recreational cannabis sales plunged 53% in Q3.

Aurora Cannabis claimed it is looking to reduce its dependence on recreational cannabis products and focus on the high-margin medical marijuana segment. The company has been hurt due to pricing pressures arising from a crowded domestic market. Its sales decline also suggests Aurora Cannabis is rapidly losing market share in a growing segment.

Alternatively, focusing on high-margin products will allow the pot giant to improve its bottom line. In Q3 its adjusted EBITDA loss narrowed to $24 million, compared to $49 million in the year-ago period.

Aurora Cannabis aims to report a positive EBITDA figure within the next 18 months which should allow the stock to recover a portion of its decline.

 

Sundial Growers

Another Canada-based marijuana producer that is grappling with mounting losses is Sundial Growers. In the first quarter of 2021, Sundial’s cannabis sales were down 30% year over year at $11.7 million.

However, the company has looked to diversify its revenue base in the past year and is well-positioned to benefit from this move. Sundial is looking to finance other cannabis companies and in Q1 its investment and loans generated $15.7 million in revenue, thereby surpassing its pot sales.

Similar to most other cannabis companies discussed here, Sundial remains unprofitable. But it has close to $1 billion in cash on its balance sheet and is debt-free providing Sundial enough leeway to improve the bottom-line going forward.

 

Charlotte’s Web Holdings

An absolute heavyweight in the CBD space, Charlotte’s Web Holdings is a small-cap stock valued at a market cap of $606 million. This cannabis stock is down 85% from record highs but has managed to increase sales from $40 million in 2017 to $95 million in 2020. Analysts expect the company’s sales to rise by 27% to $121 million in 2021 and by 29% to $156 million in 2022.

In the second quarter of fiscal 2021 ended in March, CWEB sales were up 9.1% year over year at $23.4 million. It ended the quarter with a gross margin of 58.4% and an adjusted EBITDA loss of $4.7 million.

While these numbers seem solid on the surface, investors should note that the company’s sales in Q2 of 2019 stood at $21.7 million. At the time its gross margin was higher at 73% allowing CWEB to report an EBITDA margin of 21%.

Charlotte’s Web enjoys a leadership position in the U.S. and has a wide portfolio of products that are available in 22,000 retail stores.

 

OrganiGram Holdings

The final stock on the list is OrganiGram Holdings, a cannabis stock valued at a market cap of $1.01 billion. OGI stock is up 1,000% since its IPO in 2013 but is trading 70% below record highs.

In March 2021, British American Tobacco or BAT acquired a 20% stake in OrganiGram. BAT is a tobacco company and is looking to establish a Center for Excellence at OGI’s Monckton facility. This facility will help OrganiGram develop and expand its portfolio of cannabis products. BAT is also testing a cannabidiol-based vaping product in the U.K.

This deal is valued at US$176 million and the capital infusion will help OrganiGram increase research and development expenditures as well as allow it to enter international markets in the U.S. and Europe.

In the second quarter of fiscal 2021, OGI sales were down 37% year over year at $14.46 million. The company explained it could not fulfill the demand for orders worth $7 million which means its top-line would be 50% higher in Q2. The shortfall was linked to the ongoing pandemic that infected the OrganiGram’s production employees.

However, a few months back OGI claimed it’s looking to widen market coverage which will positively impact revenue moving forward. In the last 12-months, it has launched close to 50 new cannabis products to improve brand positioning and customer loyalty.

The rising demand for recreational cannabis products will be a key driver of sales for OGI and the pot stock aims to scale its production over time.

OGI enjoys a few competitive advantages as it is the only major Canadian producer located in the Atlantic region which has experienced higher cannabis consumption among adults compared to overall figures. It allows OrganiGram to adjust production output and better estimate consumer demand.

Further, OrganiGram also has a three-tier production system at its licensed facility which means it can maximize output and reduce operating costs.

 

The final takeaway

We can see that several marijuana stocks discussed here are grappling with negative profit margins and tepid growth. However, most of these stocks have also burnt investor wealth and are trading at a lower valuation making them attractive to contrarian investors.

Further, these companies are now better equipped to estimate customer demand and are focusing on cost savings as well to improve profit margins. Finally, the prospects of weed legalization in the U.S. at the federal level will push most cannabis stocks towards record highs making them solid bets right now.

 

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