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Although 2019 was not kind to marijuana revenue and profits, 2020 looked like it was going to be a year to make a healthy difference. Exciting product launches and audacious store openings were planned, potential investors were ready to hit the Buy button, and then COVID-19 brought the world to its knees. It left many people wondering when they should buy stock in the relatively young cannabis industry.
One of the first positive signs of the year was a 10% increase year-on-year for ETFMG Alternative Harvest ETF (NYSEARCA:MJ). However, any hope that may have inspired in investors or anyone who wanted to invest evaporated as lockdown measures were implemented in the US, Canada, and almost every other country around the world.
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The global economy took a beating and stocks everywhere practically went into freefall. Due to their high value, higher debts, and lack of cash, the stocks of many marijuana companies were hit especially hard.
Although there was a spike in marijuana demand as recreational and medical users made sure they had enough to see them well into lockdown, sales had dipped by the end of March. However, the distribution of the US’ stimulus checks in April brought with it a glimmer of hope.
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Akerna (KERN), the marijuana software firm, reported that sales of the herb on Wednesday 15 April were 50% higher than any other Wednesday since legalization. The industry had not seen anything quite like it. Jefferies Analyst Owen Bennett expressed skepticism about the possibility of the obvious increase in demand being enough to give the industry the crutch that it needs, but he also recognized that the pandemic and the lockdown situation will not continue indefinitely.
Whereas Bennett has taken a somewhat pragmatic view of marijuana stocks and the industry in the face of the health crisis, Andrew Carter, an analyst for Stifel, has a different outlook, and it’s not positive. He said that even though the demand for cannabis would be high, the pandemic could have a devastating effect on the industry.
The COVID-19 health crisis has meant different things for different marijuana companies in the US and Canada. Some US companies have been pushing online and mobile orders and have been delivering everything from cannabis seeds to oil and edibles. Others have taken a more drastic approach.
Acreage Holdings put its 2020 financial targets on hold and placed employees on a temporary furlough. MedMen scrapped its financial targets. iAnthus defaulted on debt repayments, and Canopy Growth closed its Canadian stores during lockdown.
The Cronos Group complained that the coronavirus outbreak disrupted the distribution of stock. On a different note, Tilray and Aurora Cannabis said that the pandemic had not disrupted their businesses. According to Aurora, if it does feel any effects, it would most likely be during the fourth quarter.
Although they are currently undervalued, marijuana stocks will not stay that way, considering the industry’s potential for future growth. Some analysts are confident enough to believe that, once the epidemic comes to an end, the original predictions for 2020 will hold good.
New products will be launched, more stores will be opened, and thanks to cut costs and reduced product expansion over several months of the year, margin trends will pick up. That, along with increased revenue will see losses shrink and, all being well, an increase in profits.
Ultimately this means that the second half of the year could see the industry make some important gains. With this in mind, is it worth buying marijuana stock? There certainly are a few companies that look promising.
One of those companies is none other than the one that currently dominates the industry, namely Canopy Growth (CGC). One of the reasons it’s set to bounce back with a vengeance is because, unlike many other companies, it has the means to do so. While others are cash-poor, Canopy Growth has approximately $1.6 billion in investment and cash.
Another reason the Canadian company is set to see some impressive growth later this year is because the country’s market is set to grow thanks to new stores, new products, and consumers who are no doubt frustrated by supply constraints during the crisis. If you are considering buying marijuana stock, Canopy Growth is one to consider, and it is better to do it as soon as it reaches a proper buy point. The stock price may have taken a knock, but it is not likely to stay that way.
Cronos is another company that looks like it is set to see promising growth later this year. Like Canopy Growth, it has the cash for it. This also allows it the luxury of being able to pursue an aggressive post-coronavirus strategy. However, like Canopy, its stock is not in a buy range, so you will want to keep an eye on it and pounce as soon as it does get there.
2020 has not been kind to Aphria, which has seen its stock down by more than 30% year-to-date. That said, it’s stock did rally in April, which some analysts think is a sign of things to come.
The company is seeing positive action in terms of adjusted profits, volume growth, revenue growth, and gross margins. This, as well as its $345 million in cash and investments, will see it in good stead when Canada’s marijuana market picks up again after the COVID-19 pandemic. Aphria’s stock may reach a buy point before Cronos and Canopy Growth.
Aurora Cannabis is another company to keep an eye on, but before buying stock you will want to make sure that it’s in the clear from any possible coronavirus throwbacks. The company is the second biggest in Canada, but its liquidity and balance sheet have been worrisome for investors.
The company has adopted stringent measures to try to fix that in 2020. It has limited the expansion of its production capacity, restructured its balance sheet and laid off staff. Aurora can look forward to lower post-pandemic capital expenses and operating costs, which should result in better cash flow and profitability.
If you can get in with any one of these companies when their stocks are in buy range again, you could well set yourself up for a fast-growing investment.