2 Top Canadian Cannabis Stocks for a First-Time Buyer, Plus 1 to Avoid

Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) and one other stock are analyst favourites in the Canadian marijuana space.

Yesterday wasn’t a good day for cannabis stocks, with the sector largely depressed across the board. Canopy Growth (TSX:WEED)(NYSE:CGC) came in for a particular thrashing from an activist shareholder vowing to vote against its plan to buy Acreage Holdings Inc. once cannabis is legalized in the U.S.

Marcato Capital Management LP stated in an open letter to Acreage’s board that it sees the deal as “value destructive,” describing the offer as “substantially lower than the fair value of Acreage based solely on the present value of Acreage’s future cash flows.”

Are these still the front-runners in Canadian cannabis?

Down 5.35% in the last five days, weed stocks are having a hard time if even Canopy Growth is on a dip. However, down 6.57% over the last five days, HEXO (TSX:HEXO) is taking even more of a battering than Canopy Growth at the moment.

That said, both remain TSX stocks to watch in the Canadian cannabis space, and are the top choices among some analysts. Returning 117.6% in the past year, Canopy Growth has proved to be a lucrative investment. Furthermore, with its low debt at 10.7% of net worth, acceptable (if slightly high) P/B of 3.1 times book and significant 62.9% expected annual growth in earnings, this stock is a good marijuana entry point.

HEXO, on the other hand, is a Canadian weed stock that some analysts view as potentially even more favourable than Canopy Growth as an entry to the cannabis market. With similar returns of 114.1% over the last 12 months, its outlook is a little better than that of Canopy Growth, with a 63% annual growth in earnings on the way over the next couple of years. Meanwhile, debt is not an issue for HEXO, resulting in a clean bill of health when it comes to its balance sheet.

HEXO’s future cash flow relative 9% discount may not be significant in the big scheme of things, but it’s nice to see in a pot stock; as well, its P/B of 5.1 times book doesn’t seem too high a valuation in terms of real-world assets.

A pot stock to steer clear of?

Down 4.63% over the last five days, Cronos Group (TSX:CRON)(NASDAQ:CRON) is another high-flying stock — one with impressive year-on-year returns of 201.8%. With a beta of 4.25% relative to the market, it would be a clear buy for the momentum crowd were it not for the inherent uncertainty of the industry coupled with Cronos Group’s clear overvaluation.

Selling at over eight times its future cash flow value and 18.8 times its book value at writing, Cronos Group is intrinsically bad value for money at the moment. While a 79% expected annual growth in earnings is enough to excite the general growth investor, it should perhaps be noted that Cronos Group insiders ditched a high volume of shares in the last three months.

The bottom line

With a beta of 4.91 relative to the TSX Index, HEXO is a volatile investment, intrinsically more so than Cronos Group. Additionally, HEXO insiders have sold more shares than they have bought in the past three months, with more than $2 million worth of shares going back into circulation make money with stocks. The takeaway message here is that while the returns are high, even the favourite marijuana stocks are inherently risky investments.

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 Victoria Hetherington has no position in any of the stocks mentioned.

More on Stocks for Beginners

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Emerging Canadian AI Companies With Big Potential

These tech stocks are paving the way to an AI-filled future, but still offer enough growth ahead for a strong…

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Is Constellation Software Stock a Buy, Sell, or Hold for 2025?

CSU stock has long been a strong option for high growth, high value stocks. But are there now too many…

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

Asset Management
Stocks for Beginners

TFSA: 4 Canadian Stocks to Buy and Hold Forever

Thinking about what to buy with the new TFSA contribution space in 2025? These four Canadian stocks are worth holding…

Read more »

concept of real estate evaluation
Stocks for Beginners

2 No-Brainer Real Estate Stocks to Buy Right Now for Less Than $1,000

These two real estate sector-focused stocks have the potential to deliver strong returns on your investments in the coming years.

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

stocks climbing green bull market
Stocks for Beginners

3 TSX Stocks Soaring Higher With No Signs of Slowing

Don't ignore stocks just because they look like they're at a high price. Instead, see exactly why they've driven so…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »