When it comes to investing in pot stocks, investors should pull out their history books and read up on the birth of the internet services industry in the late 1990s.
Much like the internet services industry of the late 90s, the cannabis market of today is a nascent market on the cusp of huge growth over the next ten-plus years. Also like the late 1990s internet services industry, the cannabis market comprises multiple companies looking to strike gold in the market.
But only a handful of those companies will actually strike gold in the long run. Back in 2000, there were 5,000 companies in the Nasdaq composite index. Over the next several years, thousands of those companies were either acquired or shut down. Today, nearly twenty years later and at the height of the global internet revolution, the Nasdaq composite index has less than 3,500 companies.
In other words, while the internet market did turn into the world’s most important market, the emergence of the internet market was not a rising tide that lifted all boats. Instead, a few huge ships were formed. The rest sank.
The same will be true in the cannabis market. Today, the market is pricing every pot stock as if it’s going to claim some share of the global cannabis industry at scale. That won’t happen. Instead, as this market develops, expands, and matures, it will also consolidate. The result? The top pot stocks will soar; the rest will flop.
Consequently, for long term investors, there are really only four pot stocks worth considering for the long run.
Canopy Growth (CGC)
At the top of this list is the undisputed cannabis market leader. It has the most visible and reasonable pathway towards becoming the Amazon (NASDAQ:AMZN)-equivalent of the cannabis market — Canopy Growth (NYSE:CGC).
There are three big reasons to own CGC stock for the long haul. All three reasons support the thesis that Canopy projects as the leader in the global cannabis market at scale.
First, Canopy is the biggest player today. They sold nearly 10,000 kilograms of cannabis last quarter and produced revenues of over $70 million. Hardly anyone else in this space even comes close to rivaling this production scale. Thus, Canopy doesn’t have to gain share on anyone. All they have to do is maintain share.
Second, Canopy is equipped with nearly $3.5 billion in cash, cash equivalents, and marketable securities on the balance sheet, mostly thanks to a multi-billion dollar investment from alcoholic beverage giant Constellation Brands (NYSE:STZ). That $3.5 billion in cash resources is unrivaled in the cannabis industry.
Thus, Canopy has the necessary firepower to outspend and out-invest all of its competitors, which will allow Canopy to lay the groundwork for market share expansion over time.
Third, Canopy is being very aggressive with its huge cash resources. The company has aggressively expanded its production, operational footprint, and distribution network over the past several quarters through various acquisitions and expansions.
Of utmost importance, the company has laid the groundwork for U.S. market expansion through its Acreage acquisition. Thus, this company is not just resting on its laurels as the Canadian cannabis market leader. It is appropriately allocating its resources to similarly dominate other cannabis markets.
Net net, Canopy is and projects to remain the leader in the cannabis market. That makes CGC stock the best pot stock to buy and hold for the long run.
Aurora Cannabis (ACB)
Next up, we have the cannabis market’s second-largest player, Aurora Cannabis (NYSE:ACB) which, with a little help, could have just as much visibility to long-term cannabis giant status as Canopy.
Aurora is the only other cannabis company that somewhat rivals Canopy’s size and production scale. Last quarter, Aurora sold just over 9,000 kilograms of cannabis for total revenues of just under $50 million. Pretty much everyone else in this industry except Canopy sold less than 5,000 kilograms of cannabis last quarter and did revenues of less than $25 million.
Thus, based on current operations, Aurora has a nearly equal chance of Canopy to become a global cannabis giant at scale. But, Canopy has one thing which Aurora doesn’t — $3.5 billion in cash on the balance sheet.
Aurora hasn’t scored a big multi-billion dollar partnership from a global consumer staples giant like some of its peers have. Instead, Aurora only has a few hundred million dollars in cash on the balance sheet, and at current cash burn rates, that cash balance could go negative by early 2020. Because of this lack of cash backing, investors have been unwilling to project Aurora as a potential long term cannabis winner.
A big infusion of cash, either from the debt markets or through an equity investment from a consumer staples giant, will change that. It will give Aurora the necessary backing and firepower to both keep its doors open, and maintain its leadership position in the cannabis market for the foreseeable future. In so doing, it will add significant clarity to the company’s long term growth narrative.
As such, if Aurora can raise a ton of capital within the next several months, ACB stock could become one of the best pot stocks to own for the long haul.
The third pot stock worth considering long term is Tilray (NASDAQ:TLRY) because of its early leadership position in the potentially enormous medical marijuana market.
Tilray is best known as being the single pot stock that went parabolic back in mid-2018. In a matter of weeks, TLRY stock went from $20 to $300 as the cannabis craze swept through financial markets. That craze has since cooled. So has TLRY stock, which has done nothing but drop since then. Today, the stock trades hands around $40.
But, Tilray is still one of the most interesting pot stocks for the long haul. Why? This company is the early leader on the medical side of the market.
Specifically, Tilray has a market-leading portfolio of medical cannabis products. They were the first company to legally export medical cannabis from North America to four other continents. They have scored multiple big-time medical cannabis partnerships in several different countries. Additionally, they have the largest and most wide-reaching medical cannabis business.
Altogether, then, Tilray is the Canopy of the medical marijuana market, which projects to be very big one day. If Tilray can maintain a leadership position in this market, the company will benefit from robust revenue and profit growth in the long run.
All that long term revenue and profit growth potential makes TLRY stock one of the few pot stocks worth considering for the long haul.
Last on this list of pot stocks worth considering long term is Cronos (NASDAQ:CRON), a small but rapidly-growing cannabis player that has the multi-billion dollar backing of global tobacco giant Altria (NYSE:MO).
The long-term bull thesis on CRON stock isn’t about what it is today. Instead, it’s about what it could be tomorrow. Today, Cronos is a small cannabis company. Cronos sold around 1,100 kilograms of cannabis last quarter. That’s about 10% of what Canopy and Aurora sold. Revenues were under $5 million. Canopy did nearly 15-fold that last quarter.
But, Cronos has what only one other cannabis company (Canopy) has — several billion dollars on the balance sheet and the backing of a giant global consumer staples company.
Recognizing that cannabis consumption is taking share from tobacco consumption, Altria (the parent company of Marlboro)wanted to invest in the cannabis space. They proceeded to pour $1.8 billion into Cronos. That investment did three things. First, it shored up CRON’s balance sheet. Second, it gave Cronos the necessary firepower to invest and expand. Third, it represented a huge vote of confidence from Altria.
Because of those three things, Cronos has developed into one of the few pot stocks worth considering for the long haul. To be sure, valuation concerns are a big near term issue. But, those concerns will pass with time. The long term outlook here is quite favorable given the big Altria investment.
As of this writing, Luke Lango was long AMZN, CGC, and ACB.
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