Marijuana stocks have staged an impressive recovery in the first six weeks of 2019, and investors who missed the rally are wondering which pot stocks might deliver additional gains.
Let’s take a look at Aurora Cannabis (TSX:ACB)(NYSE:ACB) and HEXO (TSX:HEXO) to see if one might be attractive today to buy for your portfolio.
Aurora Cannabis
Aurora Cannabis just reported quarterly results that pretty much met analyst expectations. The business generated $54.2 million in revenue in the three months that ended December 31.
Recreational sales of marijuana went live in the middle of October, so the report is the first quarterly indication of both the level of demand and the company’s ability to fulfill orders.
Aurora derived about $26 million in medical marijuana sales and roughly $21.5 million in sales to the legal recreational consumers. Priority remains on making sure the company can meet its medical marijuana demand in Canada and abroad. The company sold $2.8 million in cannabis to medical marijuana patients in Europe in the most recent quarter. Europe is viewed as a significant opportunity for the industry, with the U.K. being the company’s latest market entry.
Aurora Cannabis is expanding its production capacity, and that should support ongoing revenue growth through the end of the year.
The stock currently trades at $9.40 per share, which is up about 50% from the low in early December but still off the $15 high it hit just before the recreational market opened in October.
With a market capitalization of $9.4 billion, the stock is expensive given the annualized revenue stream of about $200 million. The entire cannabis sector, however, is trading at lofty valuations.
Aurora Cannabis has the size to make additional strategic acquisitions to complement last year’s deals, which included the purchases of Cannimed and MedReleaf.
To date, the company has not entered a major drinks or tobacco partnership. The December announcement of the acquisition of Mexico’s Farmacias Magistrales, a company with 80,000 retail locations and 500 pharmacies, suggests an ongoing focus on the medical marijuana sector.
HEXO
HEXO just closed the sale of 8.86 million new shares at a price of $6.50 per share, raising about $57.5 million to help fund the ongoing growth of its production capacity in Canada and abroad.
The stock currently trades at $7.20 per share, so investors who’d bought the issue are already sitting on some nice gains. With a market capitalization of $1.4 billion, HEXO is much smaller than the big players in the sector, and this has pundits wondering if it will become a takeover target in 2019.
HEXO is the leading supplier in Quebec, which is a significant market in Canada. In addition, HEXO and Molson Coors Canada have teamed up to create cannabis-infused beverages for the anticipated opening of the marijuana edibles and drinks market. The partnership’s company, Truss, is expected to launch its portfolio of new products later this year.
HEXO is targeting the European market through a partnership in Greece and continues to develop its full line of cannabis-related products, including cosmetics and vapes.
The stock has traded in a $4-9 range over the past year.
Is one more attractive?
Aurora Cannabis is lagging its large peers, including Canopy Growth. This might be due to its lack of a tobacco or beverage partnership. Any news on that front could send the stock soaring, but investors should be careful. The next big deal might be another acquisition, which could put pressure on the stock.
At this point, HEXO might be the better pick. The company appears to be targeting the right segments, and while its relatively small size limits its fund-raising capability compared to its peers, it might soon find itself in the sights of a larger player that wants to secure a leadership position in Quebec.
Whether or not HEXO can command a big takeover premium is yet to be seen, but consolidation is expected to continue, and the company should be an attractive target.
