The market rally picked up steam in recent weeks, yet many pot stocks remain depressed — and for good reason. If you want to go bargain shopping for marijuana stocks, you need to be careful.
Today, some pot stocks are priced at ridiculous valuations. Fortunes are ready to be made. Other pot stocks, however, face a difficult future — one that potentially ends in bankruptcy.
Built for the long haul
We’ve learned a lot about the cannabis market since the bull run of 2018. That year, nearly every pot stock skyrocketed in value. Several companies garnered multi-billion dollar valuations during that market rally despite non-existent sales.
By 2019, those same stocks were plummeting. Most producers fell by 50% last year. Some lost more than 80%. Many investors were expecting a bounce-back in 2020, but the coronavirus pandemic squashed hopes for a rebound.
It’s been a rollercoaster, but here’s what we’ve learned.
First, cannabis producers need to be more than just cannabis producers. They need to become brands. Look at Coca-Cola. The beverage behemoth doesn’t make money by selling sugar and water, even though those ingredients constitute that majority of its products. Instead, the company profits by selling branded drinks.
Like sugar and water, cannabis is a commodity. If a company wants to avoid commoditization, it needs to figure out the branding equation.
The second lesson is that marijuana businesses must position themselves for the long run, not just for the next market rally. What exactly does that mean?
Look at Green Organic Dutchman Holdings. Last year it had a $1 billion valuation. Today it’s worth just $100 million. Sales are ramping, but the stock price is sinking. Investors don’t just demand sales growth these days, they want profits. Green Organic needs to raise money to survive, and in today’s market, fresh capital is no guarantee.
If you invest in the pot business, find a company that can outlast its financially vulnerable competition.
Buy this market rally
Given the lessons above, HEXO makes for a perfect buy amidst the market rally. But I’m not just talking about owning shares through the recent upturn. This stock should deliver gains for years to come.
When it comes to branding, HEXO is several steps ahead of the competition. The company has the second-highest number of patents in the industry, highlighting its differentiation. It was the first producer to launch a premium-branded line of products, labelled Original Stash. It also operates its own food laboratory and research facility with the goal of developing proprietary, value-add products.
Most promising is the company’s collaborations with existing brands. For example, this year HEXO is co-launching a THC-infused beverage with Molson Coors. The North American market for cannabis-infused beverages is expected to surpass $1.5 billion by 2026.
With a product ready for launch and a respected brand as a partner, HEXO is in the lead to take a large share of this nascent opportunity.
If you’re looking to buy high-growth stocks during the market rally, HEXO should top your list. Just be aware that this isn’t a short-term pick.
HEXO’s business model is built for the next decade of cannabis demand growth. Its early lead and financial stability make it an ideal long-term bet.
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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 recommends HEXO. and HEXO.
Fool contributor Ryan Vanzo has no position in any stocks mentioned.