With increasing possibility of cannabis legalization at federal level, weed stocks seem like a good investment theme. It’s worth noting that eighteen states containing 40% of the U.S. population have already legalized cannabis. This already presents a big market opportunity. However, weed stocks are likely to surge once federal legalization happens…
At the same time, it’s worth noting that U.S. is not the only big market for cannabis. Europe and Canada also have a big addressable market. The global cannabis market is expected to be worth $84.0 billion by fiscal year 2028. Therefore, a major part of growth is still impending for the sector.
While I am bullish on weed stocks, most of the stocks in the sector have been significantly volatile in the last 24 months. As an example, Aurora Cannabis (NYSE:ACB) stock has a beta of 3.18. Similarly, Sundial Growers (NASDAQ:SNDL) has a beta of over 6.0.
In my view, it makes sense to consider exposure to relatively lower beta stocks. This column will discuss four weed stocks that are best positioned to benefit from industry tailwinds in the coming years. These stocks have relatively low volatility and company specific fundamentals look strong.
Let’s take a deeper look into factors that make these weed stocks attractive.
- Canopy Growth (NASDAQ:CGC)
- Cronos Group (NASDAQ:CRON)
- Tilray (NASDAQ:TLRY)
- Curaleaf Holdings (OTCMKTS:CURLF)
4 of the Least Volatile Weed Stocks: Canopy Growth (CGC)
CGC stock is among the relatively less volatile weed stocks. For year-to-date FY2021, the stock has been sideways. With Federal marijuana legalization very likely, CGC stock seems attractive.
From a growth perspective, the outlook is attractive for Canopy. The company reported revenue growth of 23% to $152.5 million for the third quarter of 2021. EBITDA loss also narrowed to $68.4 million as compared to $97 million on a year-on-year basis.
For the next three years (through FY2024), the company expects to achieve annual revenue growth in the range of 40% to 50%. Further, with cost cutting, the company has guided for positive operating cash flow in FY2023. Positive free cash flow is expected in the subsequent year.
With product innovation in the recreational cannabis segment coupled with focus on health and wellness, strong growth seems likely. It’s also worth noting that as of Q3 2021, the company reported $1.6 billion in cash and equivalents. This is likely to help the company navigate the cash burn period.
Further, once U.S. markets open up, revenue growth is likely to remain robust even beyond FY2024. These factors have ensured that CGC stock remains relatively resilient at current levels.
Weed Stocks: Cronos Group (CRON)
CRON stock is also among the quality weed stocks. In the last six months, the stock has been in a consolidation mode (with some volatility). During this period, the stock has returned just 1.5%. I believe that a break-out on the upside seems imminent with regulatory tailwinds.
FY2020, Cronos reported revenue of $46.7 million, which was higher by 97% on a y-o-y basis. An important point to note is that the company’s revenue from the U.S. surged by 182%.
On the flip-side, Cronos reported an adjusted EBITDA loss of $147.3 million in FY2020 as compared to a loss of $98.3 million in FY2019. However, with the company investing in growth, I would not be worried about the cash burn.
For FY2020, the company reported cash and short-term investments of $1.3 billion. The cash buffer provides headroom for continued investment in sales and marketing.
Cronos Group has a strong portfolio of brands that includes products for wellness, premium-adult use and mass market products. The company’s wellness brand, Peace Naturals, has strong presence in high-growth markets of Canada, Germany and Israel. In the United States, the company is currently manufacturing and distributing hemp derived supplements and cosmetic products.
Clearly, the company is…
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