The cannabis industry is rapidly expanding, with the global legalization of medical and recreational cannabis. Though cannabis has been fully legal in Canada for some time, Canadian cannabis companies continue to struggle with profitability. Their American counterparts, on the other hand, have benefited from rapid legalization in many states.
Moreover, Canada is a smaller market than the U.S. The only thing that appears to be standing in the way of cannabis companies' full potential is federal legalization in the U.S.
The Biden administration has been working to reclassify marijuana from Schedule 1 to Schedule 3, which could take some time. Recently, the Drug Enforcement Administration (DEA) delayed the hearing until after the November election. That is a risk because the new administration may not take the same stance on rescheduling.
While reclassification (if and when it occurs) will not benefit cannabis companies in the same way that legalization would, it may open up new opportunities.
Investing in cannabis stocks can be lucrative, but it also carries significant risks. As a result, a solid risk appetite and a long investment horizon are required to reap the benefits. However, not all cannabis stocks can benefit from the industry's growth. Here are two marijuana stocks I'd avoid, and one I'd consider buying right now.
One Cannabis Stock I Would Avoid: Aurora Cannabis
Ever since Canada legalized medical cannabis in 2016, Aurora Cannabis (ACB) has been a favorite for investors. Valued at $322 million, Edmonton-based Aurora Cannabis produces and distributes medical and recreational cannabis.
Aurora moved too fast, too soon, and had a tumultuous journey in the stock market. After peaking during the 2018 cannabis boom, the stock has since fallen sharply. Several factors have contributed to the downturn, including oversupply in the Canadian market, regulatory challenges, and the company's aggressive expansion strategy, which resulted in substantial debt. The stock fell hard, to the brink of being delisted from exchanges. Aurora underwent a reverse stock split in February to avoid being delisted from the Nasdaq stock exchange.
ACB stock is up 26.2%, outperforming compared to the S&P 500 Index's ($SPX) gain of 17.2%, but the stock is down 99% from its all-time high.
Aurora has a history of financial struggles, including significant debt and cash flow issues. Over the last few years, the company has failed to meet its targets for positive adjusted EBITDA (earnings before interest, tax, depreciation, and amortization). However, it eventually achieved its goal.
In the recent first quarter of fiscal 2025, ACB reported adjusted EBITDA of $4.9 million, with revenue growing 12% year on year. Additionally, it generated $6.5 million in free cash flow. While the medical cannabis industry expanded by 13%, consumer cannabis sales fell by 10% year on year.
Furthermore, EBITDA is not a reliable indicator of profitability. The net loss for the quarter stood at $4.8 million. Aurora has been focusing on cost-cutting measures and operational restructuring to become profitable. Despite these efforts, the company continues to face challenges, including a difficult market environment and competition from established players and new entrants. While the company is working to improve its financial position, its inconsistency remains a concern for investors. I would advise you to steer clear of this stock for now.
On Wall Street, ACB stock is a “hold.” Out of the six analysts covering the stock, one rates it a “strong buy,” while five rate it a “hold.” ACB is trading above its average target price of $5.85, while its high target price of $8.03 implies a 33.6% upside potential.
The Second Pot Stock I Would Avoid: Cronos Group
Toronto-based Cronos Group (CRON) produces and distributes cannabis and hemp-derived products for the medical and recreational markets. Cronos has a global presence, including operations in Canada, the U.S., Israel, and other key markets. Like most Canadian cannabis companies, Cronos has faced numerous challenges, and its stock has fluctuated significantly.
Valued at $821.9 million, Cronos stock has gained 5.3% YTD, underperforming compared to the broader market.
A notable chapter in Cronos’ history is tobacco giant Altria’s (MO) investment in the company in 2018. While Altria has yet to reap significant benefits from this transaction, it did provide Cronos with substantial capital and resources to fuel its growth and development. Cronos' stock price skyrocketed following the Altria deal. However, broader challenges in the cannabis industry, such as regulatory hurdles and market saturation, have since dampened investors' enthusiasm.
In the recent second quarter, CRON's total sales increased 46% YoY to $27.8 million, led by 46% growth in Canada and 27% growth in the Israeli and German markets, and initial sales in the U.K. market.
However, the company remains unprofitable. Adjusted EBITDA came in at $11 million, while CRON's net loss stood at $8.7 million in the quarter.
On Wall Street, Cronos stock is a “moderate buy.” Out of the seven analysts covering the stock, three rate it a “strong buy,” three rate it a “hold,” and one rates it a “moderate sell.” Its average target price of $2.81 suggests a potential upside of 27.7% over the next 12 months. CRON has a high target price of $3.65.
The One Cannabis Stock I Would Buy: Green Thumb Industries
Compared to their Canadian cannabis companies, the domestic players are in a better financial position. Illinois-based multi-state operator (MSO) Green Thumb Industries (GTBIF) has been profitable under GAAP (generally accepted accounting principles) for three consecutive years since 2020, a rare feat in the cannabis industry. Furthermore, its revenue has increased from $216 million in 2019 to $1.05 billion in 2023.
Valued at $1.99 billion, Green Thumb’s shares have dipped 17.5% YTD, lagging the broader market.
Being vertically integrated allows Green Thumb to control everything, starting from cultivation, and extending to manufacturing, distribution, and retail. It operates a chain of retail stores — to be precise, 97 stores in 14 U.S. markets — under the brand name Rise. GTBIF's diverse portfolio includes a wide range of medical and recreational cannabis products.
Furthermore, the company's strategic focus on limited-license states, where competition is more tightly regulated, has helped it establish a strong market position and a loyal customer base.
In the second quarter of 2024, net revenue increased 11% to $280 million. In addition, GAAP net income of $0.09 per share increased by 80% over the same quarter last year.
Green Thumb's expansion plans are more strategic than Aurora's. Its emphasis on profitability without burdening the balance sheet sets it apart from many competitors. The company's ability to generate positive cash flow while still investing in growth initiatives is a significant advantage. Furthermore, its low debt-to-equity ratio of 0.33 demonstrates its disciplined financial management. At the end of the second quarter, its cash and cash equivalents totaled $196 million.
Analysts covering GTBIF expect its earnings to grow by 115.7% to $0.32 per share in 2024, further rising by 6.9% in 2025.
On Wall Street, Green Thumb stock is a "strong buy." Out of the 10 analysts who cover the stock, eight rate it a "strong buy," while two call it a "moderate buy." The average target price of $21.34 implies a potential 127.3% increase in the next 12 months. Furthermore, its Street-high estimate of $34.75 implies that the stock could rise by 270% from current levels.
Green Thumb’s strong financial performance, strategic market positioning, and growth potential make it the better choice in the cannabis space, particularly compared to Aurora Cannabis and Cronos.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
