Canadian Cannabis Stocks: A Budding Opportunity for Patient Investors

Canadian cannabis stocks such as Cronos and Tilray are top investments for those with a high-risk appetite.

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Investors targeting rapidly expanding markets should consider the cannabis sector. According to research reports, the marijuana industry is forecast to grow by 25% annually through 2030, as several states and regions are legalizing cannabis for medical and recreational use.

But as is the case with several nascent industries, there are significant risks surrounding cannabis investors. You need to identify companies with a wide economic moat, expanding profit margins, and consistent cash flows.

While most Canadian cannabis stocks are fundamentally weak, they are trading at depressed valuations, allowing you to buy the dip. Here are two Canadian cannabis stocks to buy and hold in July 2023.

Tilray stock

Shares of Tilray (TSX:TLRY) went public in 2018, shortly before Canada legalized marijuana for recreational use. Since its initial public offering, Tilray stock has declined by 86% and is trading 95% below all-time highs. Currently valued at a market cap of $1.54 billion, Tilray remains among the largest cannabis producers globally.

While Tilray has gained market share in recent years via acquisitions, it continues to post losses and burn cash. The Canadian cannabis market surpassed $4.5 billion in 2022, while Tilray reported sales of $628 million in 2022, indicating a market share of almost 14%.

Tilray initially expected to surpass $4 billion in annual sales by 2025. But these forecasts depended on the U.S. and Europe legalizing marijuana at the federal level.

Tilray has a sizeable presence in Europe, as it owns CC Pharma, a pharmaceutical distributor in Germany. It also owns a stake in several alcohol companies south of the border, which will unlock revenue streams once cannabis is legalized in the U.S.

Moreover, Tilray has a convertible debt option with MedMen, a U.S.-based multi-state operator, allowing the former to accelerate sales if the federal ban on pot is lifted.

Tilray ended the recent quarter with $408 million in cash. Comparatively, in the last 12 months, cash outflows from operating and investing activities totalled $363 million, which suggests it needs to turn profitable soon.

Analysts remain bullish on Tilray and expect the stock to surge around 80% in the next 12 months.

Cronos stock

Valued at a market cap of $1 billion, Cronos (TSX:CRON) reported net sales of $20.14 million in the first quarter of 2023, down from $25 million in the year-ago period. Its gross margins also fell to 12% from 28% in this period.

While the company is still unprofitable, Cronos is debt-free and has $836 million in cash. It is also backed by tobacco giant Altria, which invested $1.8 billion in Cronos four years back for a 45% stake in the company.

Altria has proven expertise in brand and product development in highly regulated markets. It also has the financial capacity to support growth plans and help Cronos capitalize on emerging market opportunities.

Analysts tracking Cronos stock expect shares to surge over 25% in the next 12 months.

The Foolish takeaway

Both Cronos and Tilray need to race toward profitability within the near term to protect shareholder wealth. Otherwise, the companies will have to raise equity capital resulting in another round of selloffs.

In a nutshell, investing in Canadian cannabis stocks carry significant risks due to their weak financials and million-dollar losses.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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