Two Strong Showing Pot Stocks Amidst the Aurora Meltdown

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Just as 2020 was starting to shape up to be a fruitful year for pot stock investors, the cannabis market was dealt a major blow on news that Aurora Cannabis (TSX:ACB) (NYSE:ACB), the second-largest cannabis company in Canada, was to lay off up to 500 staff and lose its long-term CEO Terry Booth amidst a cash crunch at the firm.

Pot stocks across the board were a sea of red late last week in light of Aurora's struggles; however, a few stood out as much more solid plays that look likely to be insulated from the ongoing fragility in the market. Here, we'll look at two such stocks that look like much safer bets in the ever-volatile world of pot stock investing, but first, let's take a closer look at the crisis gripping Aurora and what that means for the industry at large.

The Aurora Cash Crunch Crisis

Aurora's status as an industry leader was dealt a hammer blow following last week's bombshell announcement, which rocked the cannabis industry. However, a closer inspection of the situation shows that this announcement was a long time coming. The struggles of the industry, in general, have been apparent for months, with the lack of retail visibility coupled with the persistent dominance of the black market hindering any substantial market penetration for legitimate firms.

Aurora, like many of its compatriots, invested heavily in building out massive cultivation facilities in an effort to produce as much cannabis products to as great a scale as possible. Now, the company is left high and dry, lacking the level of sales to continue justifiably financing the construction of these sites but sitting on a mountain of oversupply of a product which, lest we forget, is perishable.

The Green Organic Dutchman (TSX:TGOD) (OTCQX:TGODF) is one such example of Aurora's problem but on a smaller scale. The company invested heavily in two sites at Ancaster and Valleyfield before running out of money to actually finish construction. This led TGOD to segment the construction of the Valleyfield facility and seek a sale-leaseback agreement on the Ancaster facility, but the damage had already been done to TGOD stock, as it crashed from $5.50 last March to just $0.67 today as rumors of bankruptcy began to circulate.

With Aurora set to undergo major restructuring in an effort to rectify the current crisis engulfing the firm, the light at the end of the tunnel for the Edmonton-based cannabis producer looks a long, long way off. So, let's take a look at two firms offering considerably better short-term stability.

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Just days after the Aurora news shook the cannabis industry, Cronos was handed an “outperform” rating by Rahul Sarugaser, an analyst at Raymond James. Sarugaser pointed to its partnership with Marlboro and Juul maker Altria Group (NYSE:MO) and the potential to capitalize on the booming US CBD industry as reasons to be bullish on the pot stock. Altria purchased a 45% stake in Cronos last year for US$1.8 billion, which will give the cannabis firm exclusive access to Altria's vape technology, a major benefit in the cannabis 2.0 market.

Cronos Group has also learned lessons from the mistakes made by firms such as Aurora Cannabis, and as such, remained asset-light and far more fiscally responsible. Altria possesses a strong distribution network in the US, which could be leveraged in Cronos's favor amid changing legislation in the cannabis and hemp-derived CBD landscapes. Trading for $9.09 on the TSX, Cronos stock could quietly become one of the best pot stocks of 2020.

Namaste Technologies (TSXV:N) (OTCQB:NXTTF)

Namaste is pretty well protected against the cannabis cash crunch given that it isn't a producer or cultivator, but instead operates one of the most popular e-commerce platforms specifically for cannabis. However, that doesn't mean it was immune from the massive underperformance of the cannabis market in 2019, dragged down over 75% between February and December while also contending with its own internal issues.

Under the new leadership of Meni Morim, who became the permanent CEO last August, Namaste Technologies has really turned its fortunes around in recent months. Just this week, the company announced that it had signed a supply agreement with Alberta Gaming, Liquor & Cannabis, the only legal retailer in Alberta and the fifth province Namaste has gone into business with. With an ever-expanding selection of 2.0 products arriving on Namaste's CannMart website, Namaste is on the front line to address consumers’ needs in the next phase of the cannabis market.

The Takeaway

Just as stability started to arrive in the cannabis market with renewed bullishness over the rollout of the cannabis 2.0 market, those gains were dashed by the bombshell news from Aurora. However, it is worth remembering how infantile the industry is, and there is no overnight fix to the problems facing firms across Canada. The two stocks mentioned above clearly have reasons to be hopeful for the year ahead, although it is impossible to tell where the next pot stock bomb may go off.

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