We at Insider Financial have been waiting patiently for the time to go all-in on cannabis names. Wednesday’s price action signaled to us that the worst is over and that a new cannabis bull run is about to begin. Here are the reasons why we like the cannabis sector and the three cannabis stocks to buy now.
Cannabis Demand Remains Strong
During the coronavirus pandemic, cannabis dispensaries were declared essential businesses. In May, BDSA data indicated surging demand across five western states. Oregon grew a stunning 87% compared to a year ago. Its legal cannabis sales in the first five months of the year are up 51% compared to a year ago.
The pandemic played a key role by giving cannabis users more time to consume cannabis but also by increasing levels of anxiety and sleep issues, brought new customers into the market. Many states allowed for curbside pick up or delivery, which wasn’t allowed in many markets previously, and these measures are likely to be made permanent.
New modes of delivery have enabled companies to implement online ordering, a massive advantage over the illicit market, as consumers are able to order cannabis just like they buy other types of products online. This has been enabled by several new payment processing options that allow electronic payment rather than cash, another big win for the legal market.
With each passing day, it looks more likely Joe Biden will become our next President. We try to refrain from talking politics here at Insider Financial, but Trump keeps giving voters a new reason every day to vote him out of office. The White House has failed its citizens in handling coronavirus and things are not improving. Trump’s poll numbers support this thesis.
There are now some projections that the Democrats will not only win the White House but control of both houses of Congress as well. Democrat control of the House and the Senate would be viewed very positively by cannabis investors. A clean sweep would unleash speculation like the cannabis sector hasn’t seen since the last Green Rush in 2017.
We were one of the first to call the bottom on Aurora Cannabis back in May at $5.60 a share. Since then, Aurora Cannabis has made a number of restructuring moves that we really like. Among the highlights announced were:
- ~25% of the SG&A staff cut. 30% cut in production staff to be completed over the next two quarters.
- Operations at five facilities (Aurora Prairie, Aurora Mountain, Aurora Ridge, Aurora Vie, and Aurora Eau) will be shuttered over the next two quarters. Aurora Vie in Quebec will continue to operate to allow for the manufacture of certain higher-margin products. By the end of FQ1 2021, production and manufacturing at Aurora Sky, Aurora River, Whistler Pemberton, and Polaris will be consolidated. Aurora Sun production scaled back to six grow bays.
- Production at its Nordic facility in Europe will be ramped up. Capacity should be sufficient to supply the European market.
At current levels, Aurora Cannabis trades at just 0.46x book and 5.14x sales.
Aphria is a cannabis stock that we have nailed in the past for big gains. We’ve not covered Aphria so far this year because Aurora Cannabis has really been leading the cannabis market higher. Matter of fact, rumors have swirled for weeks that Aphria and Aurora Cannabis were discussing a merger. On Tuesday, Canadian media said that talks had ended.
According to reports, the two pot producers had agreed that the combined business would be run by Aphria CEO Irwin Simon, with 51% of the entity going to Aphria shareholders. That structure would have represented a 22% premium from Aphria’s recent stock price and a 16% discount from Aurora’s, said the Stifel analyst. A combined Aphria and Aurora would have become Canada’s leader, with over C$1 billion in annual sales (or US$740 million), and a 30% market share.
At current levels, Aphria trades at just 0.91x book and 3.06x sales.
Canopy Growth Corp
No cannabis stock list would be complete without Canopy Growth Corp. Canopy Growth has been in a bear market ever since the board sacked Bruce Linton as CEO. Bruce was indeed an innovator and one of the best CEOs in the business, but he sold out to the devil when he took money from Constellation Brands. Once Constellation Brands become the largest shareholder, it was only a matter of time before they butted heads with Bruce and he was out the door.
Since then, new CEO David Klein has been embarking on cost-cutting measures like Aurora Cannabis and cleaning up some messes leftover from Bruce. Bruce was more of a visionary CEO that did well in good times. In today’s market, we feel more comfortable with David Klein in the CEO’s chair as he was the former CFO of Constellation Brands. Cost-cutting is his specialty.
Since taking over, CEO David Klein got rid of whatever write-downs he needed to do in the last quarter. The next earnings report will be much better. Canopy Growth is a turnaround play and one which we believe will be successful once again.
At current levels, Canopy Growth trades at 1.75x book and 21.34x sales.
Three Cannabis Stocks To Buy Now
We believe cannabis stocks are going to rally between now and up to the November elections. While there are thousands of cannabis stocks to choose from, you cannot go wrong with these three cannabis stocks to buy now – Aurora Cannabis, Aphria, and Canopy Growth Corp. Now that talks started between Aurora and Aphria, we believe that consolidation is inevitable. We could see Canopy and Aurora or Canopy and Aphria or Aurora and Aphria back at the negotiating table. We are told the issues were rather trivial – management, board composition, and salaries. The cost-savings in a merger are too compelling for it to not happen. It’s not a matter of if a big deal will happen, but when.
As always, good luck to all (except the shorts)!
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Disclosure: We have no position in any of the securities mentioned. We wrote this article ourselves and it expresses our own opinions. We are not receiving compensation for it. We have no business relationship with any company whose stock is mentioned in this article.