Tilray (TLRY) and Sundial Growers (SNDL) are down sharply from their 52-week highs amid the sell-off in marijuana stocks. Which of these looks like the best marijuana stock to buy now?
Marijuana stocks have been out of favor with markets after rallying sharply between November 2020 and January 2021. The “stock market action” shifted from marijuana stocks to cryptocurrencies, NFTs (non-fungible tokens), value stocks, and commodities. This boom-bust cycle isn't new for marijuana companies.
Why marijuana stocks are falling
First, let’s understand the reason behind the fall in marijuana stocks. All of the loss-making growth names have witnessed a sell-off and most marijuana stocks fall into this category.
Also, the high hopes of federal marijuana legalization that took marijuana stocks higher after the November 2020 U.S. Presidential election have faded. Finally, since crypto assets stole all of the thunder, a lot of Millennial investors possibly pivoted from marijuana stocks to crypto assets.
Will marijuana stocks recover?
It looks like marijuana stocks have bottomed after falling sharply from their peaks. A recovery might also be around the corner since there could be bottom fishing in some of the quality names. Also, marijuana is a long-term growth story and federal legalization in the U.S. looks like a matter of “when” and not “if.”
While the COVID-19 pandemic has hit marijuana sales, things should get better now. This brings us to the second part of the question about which marijuana stock to buy now. I will look at two names that are actually on the opposite side of the spectrum.
TLRY versus SNDL: Which is the best marijuana stock to buy?
Incidentally, one similarity is that both of these stocks were targeted by WallStreetBets. However, in Tilray’s case, it was the pre-merger or the erstwhile Tilray. Now, the company has merged with Aphria to create the new Tilray that trades on both the Canadian and U.S. stock exchanges.
Apart from their “association” with WallStreetBets, there isn't much in common between TLRY and SNDL apart from the fact that they are both marijuana companies. SNDL is mainly a play on the Canadian adult-use market as well as the massive cash on its balance sheet.
While SNDL’s market cap is only about a fifth of TLRY, it has more cash than Tilray on its balance sheet. In its earnings release, SNDL said that as of May 7, it had $752 million of cash and cash equivalents on its balance sheet.
SNDL stock: Buy or sell?
Now, there are two narratives if you are interested in buying SNDL stock. First is the bullish one that points to the ample cash on its balance sheet. As I noted in a previous article, SNDL is becoming like the Berkshire Hathaway of the marijuana industry. The company is investing and lending to several smaller marijuana companies. Also, it could expand into the U.S. adult-use market.
Meanwhile, the bearish narrative about SNDL is about the core marijuana operations that haven’t been doing well and revenues have been falling. It also had to write down a lot of inventories. While the company celebrated its first adjusted EBITDA profit, it came from the investments and not the core operations.
SNDL is a good play on its expected investments. Since the market conditions have got tough for marijuana companies, SNDL would find a lot of lucrative investment opportunities. If management can execute the plan well, SNDL could be a good investment. However, more than a marijuana stock, I see SNDL as a SPAC and a marijuana investment vehicle.
TLRY looks like a good cannabis stock to buy
As for TLRY, it looks like a good marijuana company to buy from a business perspective. The company is a marijuana powerhouse with international operations and both medical and adult-use businesses. Also, count on the post-merger synergies and economies of scale to work for the new TLRY.
To sum it up, from a purely business perspective, I would bet on TLRY. However, if you are looking at betting on an investment vehicle that can capitalize on the troubles of some of the smaller marijuana companies, SNDL would fit the bill.