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If you’ve got a high risk tolerance, then you stand to make a tonne from the emergence of Canadian cannabis producers. But with most pot stocks more than tripling over the past year, does it still make sense to buy at current levels, or is the price of admission simply too high?
There’s no question that cannabis stocks are speculative bets after such an incredible run; however, I think the odds of being in the green with an investment in the Big Three cannabis players, Canopy Growth Corp. (TSX:WEED), Aurora Cannabis Inc. (TSX:ACB) and Aphria Inc. (TSX:APH), in three years from now is pretty high. Although each stock is overvalued, there will be numerous headlines and positive developments that will fuel this rally past legalization day, which is slated for July 1, 2018 — a Canada Day to remember!
Unlike Bitcoin, which I believe is a sure-fire way to lose your entire investment, cannabis stocks present Canadians with an opportunity unlike any we’ve seen before. Nationwide legalization will pave the way for multi-billion-dollar cannabis companies that will eventually expand into areas beyond just production.
Canopy and Aurora have both made moves to get front-row seats to the medical applications behind medicinal cannabinoids, not just THC, but CBD and various other compounds that have shown some promise as a part of therapies used to treat various ailments.
I’m not suggesting that cannabis producers will turn into pharmaceutical companies; you can’t patent cannabinoids, after all. But I believe the Big Three cannabis players will continue their efforts to diversify across the broad industry. In the first few years following legalization, I believe most of the efforts will be on production ramp-ups, since many pundits are calling for a supply shortage in the initial stages.
What will the Big Three cannabis players look like five years?
To see how the cannabis firms will look as the industry matures, it’s worthwhile to take a detailed look under the hood at Canopy, a business which I believe is miles ahead of its competition. It’s not just about expanding production, it’s about agricultural innovation, branding, having a large footprint on the international scale, and R&D.
Canopy has a wide range of brands, including Tweed, Spectrum Cannabis, and Bedrocan Canada, just to name a few. And in five years from now, I think Canopy may have the edge when it comes to edging out its competition in market share thanks to its willingness to go all-in on capital expenditures in the early stages — something that I believe will pay huge dividends over the long term.
With a strong emphasis on brand awareness, I believe Canopy may have the “premium brand” that will be a household name across the globe. I’ve noted that Canopy could have the Marlboro of the cannabis industry, and if that’s the case, shares of Canopy should command a much larger premium over its peers in the space. That’s the case for now, but with Aurora picking up speed thanks to its imminent M&A spree, we’ll have an interesting battle as both firms look to one-up each other.
While near-term profitability and efficiency are still important, I’m most optimistic about Canopy’s long-term trajectory from here. The growth plan is aggressive, and the management team has shown early on that it’s serious about becoming the hands-down leader in the cannabis market.
Over the long term, you can’t go wrong with either Canopy or Aurora, which have been my two top marijuana picks over the past year. If I had to recommend one for the long haul, it’d be Canopy, even though Aurora may be the better near-term performer, as I’ve outlined in previous pieces.
If you’re looking to initiate or add to your position today, I’d buy in small chunks on any meaningful dips (~-15%) that may occur going forward. Cannabis stocks are incredibly volatile, so such dips are pretty much guaranteed in the years ahead.
A hangover in marijuana stocks, like the one earlier in the year, could also happen, so make sure you don’t bet the farm in one go. Keep cash on the sidelines and be ready should further opportunities present themselves.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.