3 Reasons Gold Stocks Are Better Than Weed Stocks Right Now

If you want the potential returns of marijuana stocks without all the volatility, consider gold stocks like Kirkland Lake Gold (TSX:KL)(NYSE:KL)

Gold bars

Image source: Getty Images

Over the past three years, marijuana stocks have been among the best-performing stocks on the TSX. Despite extreme volatility and some big downswings, stocks like Canopy Growth Corp, Aurora Cannabis Inc and Aphria have outperformed the index dramatically since they went public.

For this reason, they’ve become favourites of speculative growth investors seeking quick gains.

Now, however, the tide seems to be turning. Marijuana stocks as a class spent most of this past summer in freefall, with Horizons Medical Marijuana Index ETF shedding 24% of its value from June 21 to September 1.

Bad publicity appears to have been the main culprit, as CannTrust Holdings Inc’s (TSX:TRST)(NYSE:CTST) regulatory scandal cast a cloud of suspicion over the entire sector.

For investors seeking quick, dramatic gains, marijuana stocks may have lost their lustre. Now, however, a new class of stocks may be set to take their place. Gold stocks have risen dramatically over the summer, driven by a rising price of gold.

Despite a surprising slump in gold last week, most analysts believe that the commodity still has upside. The following are three reasons why gold stocks will perform better than weed stocks if gold resumes its bull run.

They’re more modestly valued

It’s well known that marijuana stocks trade at sky-high valuations. Even CannTrust, one of the cheaper stocks in the industry, trades at 5.97 times sales. Gold stocks, by contrast, have valuations that are reasonably within the realm of sanity.

Kirkland Lake Gold (TSX:KL)(NYSE:KL), a company that’s growing earnings at 69% year over year, trades at just 24 times forward earnings, which is low for a company with such a high growth rate.

Additionally, the company is constantly improving its operating efficiency, having reduced its cost per ounce mined by 29% in the last quarter. What this means is it can increase earnings even when gold is weak, providing a clear path to future profits that can easily justify its market price.

Gold has been on the rise

Gold has been on an epic rise this year, driven by fears of a recession. Although the commodity saw a sharp downturn last week, it should enjoy more upside if investors remain worried about a looming recession.

In times of recession, investors tend to flee to gold, as they’re seeking a safe haven asset whose value isn’t tied to the performance of the broader economy. If our current recession jitters cool off, then gold’s rally may end.

However, most economists predict a recession sometime in the next two years, so we can expect the gains to resume at some point in the future.

Gold stocks are more profitable

Last but not least, many gold stocks have the advantage of established, growing profits. Although this isn’t true of all of them, it’s definitely true of the more established players in the industry.

If we look at Kirkland Lake Gold, we see that it’s not only consistently profitable, but it also possesses very high margins. The company has a profit margin of 34%, and an ROE of 28%. By contrast, a company like CannTrust had no positive earnings to speak of in its most recent quarter.

The comparison above shows a key difference between gold stocks and weed stocks. Whereas gold stocks like Kirkland Lake can be highly profitable, marijuana producers like CannTrust usually have no track record of profitability to speak of.

Of course, this depends on which type of gold stock we’re talking about. Junior miners often go public before having any real revenue. In general, however, there are a lot more profitable companies in gold mining than there are in marijuana cultivation.

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 contributor Andrew Button has no position in any of the stocks mentioned.

More on Metals and Mining Stocks

TSX Today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Friday, September 30

Increasing macroeconomic uncertainties could keep TSX stocks highly volatile in the near term.

Read more »

Nickel ore is mined from the ground.
Energy Stocks

3 Top Commodity Stocks TFSA Investors Can Buy Right Now

Commodity stocks such as Albemarle and Barrick Gold may provide investors an opportunity to deliver outsized gains in the next…

Read more »

gold stocks gold mining
Metals and Mining Stocks

2 Gold Stocks to Buy in 2022

Gold stocks are usually chosen for their ability to act as hedges against the market, but when sold at the…

Read more »

TSX Today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Thursday, September 29

TSX stocks could remain volatile today, as investors react to the latest quarterly U.S. GDP numbers.

Read more »

Nickel ore is mined from the ground.
Metals and Mining Stocks

Offset Market Volatility With a Shiny Investment

Looking to offset market volatility with a shiny investment you can hold for the long-term? Here’s a precious option to…

Read more »

gold stocks gold mining
Metals and Mining Stocks

Is it Time to Grab TSX Gold Stocks at Their Multi-Year Lows?

Gold stocks generally outperform in falling markets. However, this time, it's different.

Read more »

Upwards momentum
Energy Stocks

Gold and Energy: Here Are Two of the Best Stocks to Buy Now

Gold and energy stocks are some of the best to buy now for very different reasons.

Read more »

Nickel ore is mined from the ground.
Metals and Mining Stocks

2 Top Commodity Kingpins to Hedge Your TFSA Portfolio

Consider Nutrien (TSX:NTR)(NYSE:NTR) and another top commodity play to hedge your TFSA portfolio right now.

Read more »