Not a whole lot has gone right for the legal cannabis industry over the past 10 months. Valuations across the space have absolutely cratered during this period thanks to a suite of headwinds such as burdensome tax rates, a stubbornly persistent black market, and a slew of highly questionable management decisions. Brighter days may be close at hand, though. A Bernie Sanders presidency — while speculative to say the least — would mean the immediate end to federal prohibition on cannabis in the United States. Moreover, Canada’s so-called “Cannabis 2.0” has officially gotten under way, which should boost earnings among the country’s top cultivators by mid-year.
Which cannabis stocks are the best buys in February…
The two most attractive names within the realm of pure pot plays this month are easily Aphria (NYSE:APHA) and HEXO Corp. (NYSE:HEXO). Here’s why these two Canadian cannabis stocks might be worth buying right now.
Aphria: It’s time to forgive and forget
Aphria’s bull thesis boils down to two central issues. First, the company sports the second-lowest valuation among all top-tier Canadian cannabis cultivators right now. With a forward-looking price-to-sales ratio of around three, the only pure Canadian pot play that’s more expensive than Aphria at the moment is Sundial Growers, a company currently being rocked by an unexpected shake-up in the C-suite.
Secondly, Aphria has clearly established itself as a true international player in the cannabis space with the success of its German subsidiary CC Pharma. The net result is that Aphria has quickly become one of the only Canadian cannabis companies to reach profitability on a recurring basis. The company, in turn, was able to strike a sizable equity deal with an institutional investor recently, giving it one of the longest cash runways in the industry.
Why is Aphria’s stock trading at dirt-cheap levels? The long and short of it is that Aphria has yet to regain Wall Street’s trust after the company’s Latin American scandal under its former management team. Because of these questionable deals, the company seems almost certain to take more than a few goodwill impairment charges this year. As things stand now, though, it’s probably time for investors to forgive and forget this transgression. Aphria is on the right track, and it arguably deserves a richer valuation as a result.
HEXO: Righting the ship
The past year hasn’t been kind to HEXO Corp. The company’s shares have lost over two-thirds of their value during this period due to both poor management and the slow rollout of brick-and-mortar retail locations in key provinces like Ontario and Quebec. On the management side of things, HEXO has had to idle production at a key grow facility, pull its financial guidance for fiscal year 2020, and lay off a portion of its workforce to conserve cash. What’s more, HEXO’s shares have sunk so low at this point that the company is in real danger of falling below the minimum bid requirement for the New York Stock Exchange — that is, if this downward trend continues for much longer.
A ray of hope is starting to shine, though. HEXO has…
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