Marijuana stocks have been on a wild ride in 2018, and the pullback in the sector in the past two months has investors wondering which cannabis stocks might be the best buys heading into 2019.
Let’s take a look at HEXO (TSX:HEXO) and Canopy Growth (TSX:WEED)(NYSE:CGC) to see if one deserves to be in your portfolio right now.
HEXO is Quebec’s leading cannabis company with the province’s largest supply agreement and a three-year contract to run the processing and distribution of Quebec’s online cannabis sales.
The company currently has 310,000 square feet of production space and is completing the construction of an additional one-million-square-foot facility. This should enable HEXO to ramp up production through 2019 to meet growing cannabis demand.
In Europe, HEXO has plans to build a 350,000-square-foot facility in Greece with a local partner. The site will serve as the base for supplying medical marijuana patients in the region as European countries adjust their regulations.
Beyond the traditional marijuana products, HEXO is developing cannabis-based cosmetics, edibles, and infused beverages. It has partnered with Molson Coors Canada to create a new company, Truss, that will market cannabis-infused drinks when that segment opens in Canada in 2019. The new company will base out of a two-million-square-foot facility in Belleville, Ontario.
HEXO traded as high as $9 in recent months but is now down to $5 per share. At the current price, the company has a market capitalization of just under $1 billion.
This could make it a takeover target for one of the larger players in the industry. Consolidation is expected to continue, and HEXO’s strong position in Quebec, coupled with its infused-beverages partnership, should be highly valued.
Canopy Growth is considered by many to be the leading name in the marijuana market. The company moved early to buy up competitors and secure its place as the leading provider of medical marijuana to registered patients in Canada.
In addition, Canopy Growth bought a German pharmaceutical distribution business and is building production facilities in Europe to supply the market. The company also has operations in Australia and is well positioned to capitalize on opportunities in South America through its research and development facilities in Chile and production operations in Colombia.
Canopy Growth sold an initial 9.9% stake in the company to Constellation Brands for $245 million in 2017. The U.S.-based owner of Corona raised its holding in Canopy Growth to 38% this summer through an additional $5 billion investment.
Canopy Growth currently trades at $39.50 per share, giving the company a market capitalization of roughly $13.6 billion. Constellation Brands paid $48.60 per share in August, so investors have an opportunity today to buy Canopy Growth at a nice discount to that price. The stock topped $76 in October.
Canopy Growth has the size and financial capacity to make strategic acquisitions. In recent months the company bought a vaporizer maker, a branded products company, and a leading hemp research firm.
Is one more attractive?
The pullback in the stock prices of HEXO and Canopy Growth certainly make the companies more attractive today than they were just two months ago, although the sector remains expensive and investors should anticipate further volatility.
That said, if you are of the opinion the Canadian and global cannabis markets are going to evolve as expected, this might be a good time to take a position in HEXO or Canopy Growth.
Investors who like to bet on the underdog might want to consider HEXO today. The stock could deliver a near-term windfall if a suitor makes an aggressive takeover bid. Otherwise, Canopy Growth would be a solid buy-and-hold pick to get exposure to the cannabis industry.