Ultimately, the key for the industry is simple. Cannabis legalization at the federal level would open the floodgates for everything from financing to purchasing, and so much more, for the industry. The Alliance Global analyst, like others that cover the industry, spotlighted how crucial the change would be:
To be clear, we are not making the case that the impact from the Coronavirus will push for cannabis legalization at the federal level in 2020 or even 2021. However, we do believe that this has only further emphasized the importance of cannabis in today’s society and the need to reconcile differences in state and federal laws. Thousands of businesses have been shut down, but some cities and states have deemed cannabis “essential”, and we believe it only makes sense that such an “essential” part of society (especially medical) not be considered breaking federal law. Today, cannabis firms could have difficulty accessing federal assistance as they are not federally legal businesses – despite the fact these are state legal businesses subject to federal tax, Instead businesses, and more importantly workers, are left with greater uncertainty in-terms of federal relief for business and its workers during this time. That said, we still believe there are a number of issues to resolve before we see federal cannabis being legal or permissible. We still see a higher likelihood of a bill such as the SAFE Act (legalize cannabis depository banking) before the STATES Act (federal legal within states where legal), and do not see full federal legalization occurring in the near-future. However, we believe this pandemic has only helped the case for eventual federal legality/permissibly.
We searched through the wreckage of the cannabis stocks looking for ideas that make sense for investors and found two that look like solid picks. Note that these are only suitable for very risk-tolerant accounts.
This is one of the only marijuana companies that actually isn’t losing money constantly. Aphria Inc. (NASDAQ: APHA) engages in the production and supply of medical cannabis. It operates through the following segments.
The Cannabis Operations segment produces, distributes and sells both medical and adult-use cannabis. The Distribution Operations segment’s operations are carried out through its wholly owned subsidiaries: ABP, FL Group and CC Pharma. The Business Under Development segment includes operations in which the firm has not received final licensing or has not commenced commercial sales from operations.
The Alliance Global report notes that the company had $500 million Canadian on the balance sheet as of November 2019, and an additional $100 million Canadian raised from a strategic investor. Additionally, the company has reported positive adjusted EBITDA in the past three quarters, while most of the large companies continue to report notable losses. The firm rates the stock a Buy, but no price target was available.
Merrill Lynch also has a Buy rating, along with a $3.44 price target. A Wall Street consensus price target was not available. The shares closed trading on Monday at $2.54.
This company had a major international company take a large position late in 2018. Cronus Group Inc. (NASDAQ: CRON) is a global cannabis company founded in 2012 and based in Ontario, with a presence across five continents. Its principal activities are the production and sale of cannabis and cannabis-derived products in federally legal jurisdictions.
Back in December of 2018 Altria agreed to buy a 45% stake in Cronos for about $1.8 billion, a sign of the new world in which the tobacco companies must compete. This strategic partnership provides Cronos with additional financial resources, product development and commercialization capabilities, and deep regulatory expertise to better position it to compete, scale and lead the rapidly growing global cannabis industry.
Altria’s investment in Cronos also gives it the option to increase to full ownership if it so chooses down the road.
Merrill Lynch has set a $7.56 price target on the shares, and the stock closed Monday at $5.12.
It is important for investors to remember that between institutional short and long selling and the general malaise that has fallen over the pot stocks, the opportunity for aggressive accounts could be immense. However, federal legalization could remain in the distance. Yet, if (and many people say it’s a question of when, not if) legalization happens, you can expect some parabolic moves to come back to the sector like in 2018.
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