Which of These 2 Top Cannabis Stocks Is a Buy in 2020?

While Canopy Growth Corp (TSX:WEED)(NYSE:CGC) looks like a market leader in the making, another pot stock could be a takeover target.

| More on:

As Peter Lynch says, “If you only invest in an index, you’ll never beat it.” This is why picking stocks is so important and the only sure way to escape a flat market. Just look at the end of last week, when some cannabis stocks were seeing +5% gains, while Horizons Marijuana Life Sciences ETF was down 4%.

However, the canny investor also said, “Invest in what you know.” And while Canadians may be no strangers to cannabis itself, the Canadian legal market is still undiscovered territory. That’s why only the biggest cannabis producers are a buy as a confluence of tailwinds ushers in the third act of pot stocks in 2020.

The first act was pre-legalization, which saw pot stocks explode in a way that put many investors in mind of the dotcom bubble. The second act came when legalization burst that bubble and saw disappointed stockholders cash in their chips, cratering the sector. The third act is Cannabis 2.0, which is now beginning to test the market.

But what of those tailwinds? Most significant among them is Ontario’s re-ordering of its retail environment, which will see the lottery system scrapped and up to 250 new outlets open their doors by the end of 2020. Other big moves revolve around Canopy Growth and developments south of the border that could see huge growth in the U.S. cannabis markets.

Popular player to takeover target

The idea that HEXO (TSX:HEXO)(NYSE:HEXO) could be the subject of a buyout is not a new one. The news that the company is issuing a further 12 million shares certainly struck a chord with investors, and not in a good way. HEXO shares plummeted 21% at the end of last week, as the markets reacted to the possible dilution of the legal marijuana player’s stock. The plunge brought HEXO to a more than two-year record low.

The move marks the end of a bad year for HEXO, which managed to fall off several cliffs in succession. Not least of the market-moving headlines was HEXO’s announcement that it was downsizing to the tune of 200 positions. Long-term investors can now take a couple of views: that HEXO’s management is playing a long game, or that the company could become attractive to a larger producer.

While Canopy was itself down around 3% over the Christmas week, it was nowhere near the precipitous plunge experienced by HEXO. From a new CEO to the fruition of its relationship with Constellation Brands, Canopy Growth is still looking like as strong a play as any in the legal marijuana space. Will that third act finally tie the legal cannabis narrative together?  The first quarter of 2020 could reveal all.

The bottom line

HEXO has value as a takeover target. Look at Cineplex and the huge boost it got on the back of the Cineworld overture. If HEXO were to become such a target, news of a deal could similarly reward shareholders. A speculative investment in HEXO alongside a long position in Canopy Growth would be a relatively low-exposure play on Canadian cannabis covering both long- and short-term capital gains.

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. The Motley Fool recommends Constellation Brands, HEXO., and HEXO.

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 »