How Rich Are These Stocks?

I often hear two complaints about investing in Big Cannabis stocks. First, all these companies look alike. Second, they’re all wildly overpriced.

The truth is a little more complicated. Aurora Cannabis Inc. (NYSE:ACB), Tilray Inc. (NASDAQ:TLRY), Cronos Group Inc. (NASDAQ:CRON) and Canopy Growth Corp. (NYSE:CGC) all compete for cannabis sales contracts, so they are all indeed operating in the same space.

However, each has a different strategy for turning those contracts into cash flow. Most have spent a lot of shareholder money building greenhouses and boosting their in-house cultivation capacity. Others are happy to buy the dried plant from small growers and process it into new products.

In an industry evolving this fast, the nuances often get lost. This stage of development is really all about simply capturing as much market share as possible and then finding efficiencies of scale from there.

It is not brain surgery at this stage. It is a classic land rush where speed matters. The stocks reflect that situation. They aren’t priced for profit.

Big Cannabis is priced for growth. But even then, I’ll be the first person to acknowledge that these stocks trade at wildly different valuations for what amounts to the same projected end state.

Canopy, for example, has alienated strategic investors because of a lack of confidence that the current operation will ever be profitable. Those investors have looked years out on the calendar and the numbers simply don’t add up.

However, the company is generating a lot of cash and will continue to grow its share of the legal market. On that basis, people are paying about 17X current revenue, which I consider expensive.

Canopy’s arch-rival Aurora probably needs three years to break even. That’s worth a somewhat more expansive multiple because we can envision a profitable future ahead. It trades at 29X current revenue.

Tilray was built for efficiency and might generate positive cash flow before mid-2021. At that stage, it’s going to be expensive on an earnings basis, but it is discounted relative to its peers today at 14X revenue.

And then you have smaller and more hopeful players like Cronos, which are more speculative right now (82X revenue is no bargain) but could grow into their stock price in years to come.

Cronos could double between now and 2022 and still only command the multiples that Tilray gets today. If I were picking either stock, I’d take the one with the most runway ahead.

But I haven’t picked either for my Turbo Trader “Marijuana Millionaire Portfolio”. There are better stocks in the space.

Selection is crucial when a hot market theme shifts out of favor. Since I started the “Marijuana Millionaire Portfolio”, we’ve booked two double-digit-percentage profits and our remaining stocks are holding up relatively well.

The Big Cannabis names we’ve discussed here are down a staggering 30 percent over that period. They’re getting cheaper. They’re just not attractive enough yet to get in front of my subscribers.

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