2 Pot Stocks That Can Survive the Coronavirus Crash

Pot stocks like Cronos Group Inc (TSX:CRON)(NASDAQ:CRON) have a major advantage that few competitors possess.

edit Jars of marijuana

Image source: Getty Images

Pot stocks were crushed during the 2019 marijuana downturn. The 2020 coronavirus pandemic has made a bad situation worse.

Many investors are hoping that the coronavirus crash will be a brief affair. Encouraging data points from China and South Korea prove that the pandemic can be contained, but countries like the U.S. and Canada could be weeks or months away from a slowdown.

Here’s the most important thing to keep in mind: the bear market won’t end once the coronavirus passes. Thousands of small businesses are already being pressured. Many will go out of business, never to return. Larger corporations are also feeling the crunch. Firms that appeared well capitalized are suddenly preparing for the worst.

Pot stocks are particularly vulnerable. Most are just starting to ramp sales. Many are years away from generating positive free cash flow.

In the 2008 financial crisis, it was wrong to think that the damage would be limited to a few thousand people defaulting on their mortgages. Due to our hyper-connected financial system, the systemic effects had a far-reaching impact. The coronavirus crisis will follow a similar path.

In years past, it was valuable to find out which pot stocks would grow the fastest. This year, it’s critical to determine which pot stocks can survive.

Pot stocks will change forever

For years, continued financing was a given for pot stocks. Even if it involved diluting shareholders or issuing expensive debt, new capital could be brought in, especially when prices were skyrocketing in 2018.

Access to capital can no longer be taken for granted. Investors and institutions are scrambling to raise cash as asset prices fall. Companies that have elevated debt levels or lacklustre credit ratings are in trouble. Firms that can’t quickly pivot to a cash flow neutral business model may not survive without massive government intervention.

Green Organic Dutchman Holdings is a prime example of what can go wrong when capital dries up. Sales aren’t expected to ramp strongly until later this year, meaning inbound cash flow is low. Last quarter, the company posted a net loss of $160 million. That’s greater than the current market cap. Green Organic has less than $30 million in cash, yet it’s burning more than $20 million per quarter.

Since the pandemic began, shares have shed 50% of their value. It’s doubtful that capital markets will come to the rescue. An outright bankruptcy is in the cards.

These companies will survive

Remember, it’s not about future growth at this point, it’s about surviving the current crisis. Whichever pot stocks survive have the opportunity to consolidate the market, acquiring insolvent competitors and taking their market share. Only a handful of companies are a shoe-in for survival.

The first is Cronos Group. As of last quarter, the company had $2.2 billion in cash. The company has virtually no debt and is only burning roughly $300 million per quarter when stripping out acquisitions. This gives the company at least a year of runway before it needs to tap capital markets.

Cronos is in such an enviable position thanks to its agreement with Altria Group, which infused the company with $2.6 billion in cash last year. If conditions turn dire, Cronos can likely turn to Altria again for an emergency infusion.

Canopy Growth is in a similar position. The company has more than $2 billion in cash and short-term securities. Its burn rate is also roughly $300 million.

As with Cronos, Canopy secured this comfortable position thanks to a previous deal with Constellation Brands, which pumped $4 billion into the company. Constellation generates a large amount of quarterly free cash flow, so if Canopy needs to top off its reserves, a lifeline will be available.

This is an incredible opportunity to scoop up distressed pot stocks. Just make your picks carefully.

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.

The Motley Fool owns shares of and recommends Constellation Brands. Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Coronavirus

Plane on runway, aircraft

Can Air Canada Double in 5 Years? Here’s What it Would Take

Air Canada (TSX:AC) stock has gone nowhere since 2020. Can this change?

Read more »

Senior housing
Stocks for Beginners

Home Improvement Stocks Are Set to Fall (When They Do, Buy These Like Crazy!)

Home improvement stocks are due to drop further in the coming months. But with solid underpinnings for the sector, it…

Read more »

An airplane on a runway

Forget Boeing: Buy This Magnificent Airline Stock Instead

Boeing (NYSE:BA) stock is looking risky right now, but Air Canada (TSX:AC) stock? Much less so.

Read more »

Man considering whether to sell or buy
Stocks for Beginners

Goeasy Stock: Buy, Sell, or Hold?

When it comes to smart buys, goeasy stock (TSX:GSY) is up there as one of the smartest money can buy.…

Read more »

Woman has an idea
Stocks for Beginners

Here’s Why Magna International Is a No-Brainer Value Stock

Magna stock (TSX:MG) has been climbing back once more, but still offers huge value for long-term minded investors.

Read more »

Aircraft wing plane

1 TSX Stock Down 60% That Could Bounce Back Stronger

Air Canada (TSX:AC) stock got severely beaten down in the March 2020 COVID crash. Here's why it's probably not going…

Read more »

A bull and bear face off.
Stocks for Beginners

Down 30% in 3 Months, Is AC Stock a Buy Today?

Air Canada stock (TSX:AC) climbed this year and is still up 10% in the last year, but down 30% in…

Read more »

Airport and plane
Stocks for Beginners

This Bargain Stock Is the Cheapest It’s Been in Years

This top stock still trades below $25 per share, despite much positive movement. A strong opportunity could be in the…

Read more »