If You’re Going to Buy a Marijuana Stock, This Is the Only 1 You Should Buy

The marijuana sector is overpriced. If you are determined to buy a cannabis stock, stick with the leader in the sector, Canopy Growth Corp. (TSX:WEED)(NYSE:CGC).

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I truly believe that at this point, you should not be buying any marijuana-related stocks. The risks currently far outweigh the benefits, it seems to me, for anyone looking to invest in a cannabis company.

These companies are fundamentally overpriced. Considering that the companies I have seen, for the most part, do not have earnings or free cash flow, there appears to be little reason to buy them on fundamental grounds. I suppose you could argue that, for many companies, their revenues have been increasing, but I do not believe this makes a compelling investment.

Even with all of these different problems, though, I know that some of you won’t be able to resist the siren call of marijuana stocks. If you are drawn to the sector, stay with the leader, Canopy Growth Corp. (TSX:WEED)(NYSE:CGC).

Canopy is now listed on both Canadian and American exchanges, which provides the shares with more liquidity than merely being listed on the Canadian exchange. Canopy has multiple well-known brands and a growing medical business segment which is operating around the world.

Canopy, much the same as other marijuana stocks, does not yet have earnings or free cash flow worth speaking of. While you could argue this is due to growth and newness of the sector, it does not exactly inspire confidence. However, Canopy has been growing sales, increasing revenues by 123% year over year as of its Q3 2018 report.

The company also has a solid balance sheet with a significant amount of cash on hand and basically no debt. It could easily pay off all of its liabilities and still have the cash to spare. Much of this cash has come in the form of share issuance, which could be a stroke of genius by management if the shares are as overvalued as they seem to be.

In addition to improving financials, the company has also been making many high-profile strategic partnerships. One notable company Canopy has formed a relationship with Constellation Brands Inc. (NYSE:STZ), a major U.S. producer and marketer of spirits, beer, and wine, to produce cannabis-based beverages in the future.

While the marijuana business is still developing, and there are still many unknowns, a company such as Canopy is better positioned than most to prosper when legalization is finalized in Canada. Its strong balance sheet, strategic partnerships, and strong brand portfolios seem to indicate that the company will maintain its leadership in the coming years as the market matures.

A recent statement from the CEO provides me with more faith in the future success of this company than I have for others in the industry. Canopy seems to recognize that much of the sector consolidation is being done at premium prices, with a large amount of debt being issued. Canopy, the CEO confirmed, would rather maintain its solid balance sheet than engage in euphoric acquisition spending.

I still maintain that the sector is overpriced and that the stocks have run far ahead of the business. However, if you are determined to buy a marijuana stock, stick to a sector leader, particularly one like Canopy that has a strong balance sheet and a good strategic plan for the future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributors Kris Knutson has no position in the companies mentioned.  

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