In just over two weeks when we turn the page on 2019, it’ll almost certainly go down as the worst year on record for marijuana stocks. What began as a very promising year that saw more than a dozen cannabis stocks rise in value by at least 70% during the first quarter looks as if it’ll end with more than three-quarters of all marijuana stocks losing at least a double-digit percentage in 2019. Relative to the benchmark S&P 500, we could be talking about an underperformance of at least 35 percentage points, if not much more, for the typical cannabis stock.
Leading the pack in the disappointment department are…
Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC), two of the largest and most popular pot stocks. Through this past Wednesday, Dec. 11, Aurora Cannabis had shed 53% of its value, with Canopy Growth down by a more “subtle” 30% year to date.
The thing is, Wall Street is always forward-looking, and these poor performances could easily be placed in the rearview mirror if the cannabis industry does a better job of executing in 2020. The big question is, between Aurora and Canopy, which pot stock looks destined to have a better year in 2020? Let’s take a closer look by breaking down the positive and negative potential catalysts for each company and then make a final decision.
Let’s begin by taking a look at some of the positive catalysts that could send Aurora Cannabis’ share price higher in 2020. In no particular order, these factors include:
- A move into the U.S. cannabidiol (CBD) market.
- Ontario rolling out additional dispensaries, thereby boosting legal-channel sales in Canada’s most populous province.
- Improved economies of scale that should result in some of the lowest per-gram production costs among major growers.
- The ramp-up of cannabis derivatives, such as vapes and edibles, which are considerably higher-margin products than traditional dried cannabis.
- An improved regulatory environment throughout Europe that encourages Canadian imports.
- The potential to secure a brand-name partnership in the food or beverage industry.
Arguably the biggest catalyst of the group would be the ramp-up of high-margin derivatives, which could actually wind up outpacing dried cannabis in annual sales. Derivatives speak to a younger generation of users, and they’re a considerably higher-margin product. In other words, a rapid ramp-up in derivative sales, when combined with improved production costs, could produce a more palatable income statement for Aurora.
On the other hand, there are downside catalysts that investors will be on the lookout for. These include:
- Persistent supply issues throughout Canada that encourage black-market sales and constrain not only dried flower but derivative supplies.
- Ongoing pushback from the U.S. Food and Drug Administration (FDA) over the safety of CBD, leading to CBD-product sales weakness.
- A goodwill writedown, considering that Aurora’s goodwill stood at 3.17 billion Canadian dollars at the end of fiscal Q1 2020.
- Continued share-based dilution given that Aurora has yet to land a brand-name partner.
- A delay by overseas countries in establishing medical marijuana regulations, thereby constraining overseas demand.
Just as the launch of derivatives would be Aurora’s key catalyst, it’s pretty clear that supply constraints impacting the ability of derivatives to hit dispensary shelves would also qualify as the company’s biggest risk in 2020. Remember, as of the one-year anniversary of adult-use sales commencing in Canada, Ontario had a meager two dozen open dispensaries, or about one for every 604,200 residents.
Now it’s time to switch gears and take a closer look at the largest marijuana stock in the world by market cap, Canopy Growth. Next year, there are a number of catalysts that have the potential to send its share price higher. In no particular order, these are…
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