Pot stocks have seemed to be constantly climbing in the past few months in the lead-up to the opening of Canada’s recreational market next week and as states across the U.S. pass new legalization measures.
Investors are eating up cannabis stocks with the expectation that sales are about to explode higher and share prices along with them.
But while the opening of Canada’s recreational market is all but sure to cause a spike in share prices of marijuana stocks, that excitement can only last so long. Once the dust settles, the stocks that continue to shine will be those companies that have positioned themselves well in Canada’s recreational market and beyond.
Some of those companies may also become attractive buyout targets for larger corporations in the beverage, tobacco, or even pharmaceutical spaces as they try to capitalize on the explosive growth of the marijuana market.
Here are two pot stocks that I think could be possible takeover targets.
Canopy Growth Corp. (NYSE: CGC)
Canopy Growth (NYSE: CGC) might be one of the largest pot stocks by market cap and one of Canada’s top producers, but that doesn’t mean it’s too big to be bought out. And there’s one stand-out potential buyer.
A year ago, Constellation Brands (NYSE: STZ) invested $190 million in Canopy Growth for a 9.9% equity stake. Then early this summer, the maker of Corona and Modelo beers snapped up a third of Canopy’s C$600 million convertible note offering. And then in mid-August, Constellation Brands revealed that it had upped its bet on the grower by $4 billion, a deal that resulted in an almost instant 30% surge in the marijuana stock’s price.
In total, Constellation Brands will have a 38% stake in Canopy Growth once approved by regulators, and will have the ability to increase that stake to 50% if the beer maker exercises the 139.7 million warrants that have come with its investment.
Many pundits and investors are expecting this partnership with Constellation Brands to result in a cannabis-infused beverage. But Constellation Brands has very deep pockets, powerful brand names in its portfolio, and the infrastructure and marketing know how to help push Canopy Growth to the next level. Constellation Brands’ beer sales have also slowed in the last few years, so an investment in the rapidly growing cannabis space would be a logical move.
If the two companies prove to work well together, we could see a buyout in the future. However, that’s not likely before 2021 as Constellation’s massive investment in Canopy Growth in August will take a toll on Constellation and the company’s management is insistent about maintaining a certain leverage ratio on its balance sheet.
What sets OrganiGram (OTC: OGRMF, TSXV: OGI.VN) apart from other growers is that it only operates one production site, enabling the company to better control costs and, thus, improve its margins above other growers.
And the company is making great use of its single grow site. OrganiGram is using a three-tiered growing system which is enabling it to scale its production capacity to 113,000 kilograms annually in its 480,000 square foot Moncton, New Brunswick grow site. To understand just how impressive this is, there are other growers with over 1 million square feet producing just 75,000 kilograms annually.
The company is also diversifying beyond dried cannabis. OrganiGram reported a 297% increase in sales of its cannabis oil in Q2, which comes with higher margins than dried cannabis, and also won two awards for its dried flower product line at the Canadian Cannabis Awards last year. These awards mean that the company will be able to use premium pricing for its dried flower products.
OrganiGram is also expanding its international presence by expanding into Australia and Germany, a move that is likely to spark interest among beverage or tobacco companies for a partnership or takeover – and news of either would send the stock soaring.
The company’s strong balance sheet, outstanding revenue growth, positive earnings in the last two quarters, and relatively low valuation compared to its peers also make it an attractive target for a buyout.