2 Hot Marijuana Stocks Listing Soon on U.S. Exchanges -- Are They Buys?

Keith Speights, The Motley Fool

Updated Sun, Oct 14, 2018, 4:31 AM

Two marijuana stocks that are currently listed on Canadian stock exchanges soon plan also to list on U.S. stock exchanges. Aurora Cannabis (NASDAQOTH: ACBFF) (TSX: ACB) expects to trade on the New York Stock Exchange (NYSE) by the end of October and Aleafia Health (NASDAQOTH: ALEAF) should soon trade on the Nasdaq stock exchange.

So far in 2018, Aurora's share price is up more than 30%. Aleafia stock has skyrocketed close to 350% year to date. Are these hot marijuana stocks that are coming soon to U.S. stock exchanges smart picks to buy now?

Wall Street sign in front of New York Stock Exchange.

Image source: Getty Images.

Historical perspective

Only three Canadian marijuana stocks are currently listed on major U.S. exchanges. Cronos Group became the first when its stock began trading on the Nasdaq on Feb. 27, 2018. Canopy Growth was the first Canadian marijuana stock on the NYSE with its listing in May 2018. Tilray joined Cronos on the Nasdaq in July.

You might think that exposure to a big new pool of investors would have provided a big boost to each of these stocks. And you'd be partially right. Cronos jumped 18% following its Nasdaq listing. Tilray stock soared more than 30% on the first day of trading on the Nasdaq. Canopy, on the other hand, saw its shares drop after its listing on the NYSE.

It's not that the Nasdaq has some kind of advantage for marijuana stocks than the NYSE does. The situations for each of these three Canadian marijuana growers were different.

Cronos received an inordinate amount of attention as the very first Canadian marijuana stock to be listed on a major U.S. exchange. Unlike the others, Tilray conducted its initial public offering (IPO) on a U.S. exchange rather than a Canadian exchange. As for Canopy, its stock had risen nearly 20% in the days following its announcement of plans to list on the NYSE.

The newbies

The situations for Aurora Cannabis and Aleafia Health will be unique, as well.

Aurora initially considered listing on a U.S. stock exchange earlier this year. However, the company became so busy gobbling up other marijuana businesses that it opted to delay its plans. In fiscal year 2018 alone, Aurora made 11 acquisitions and is in the process of completing another deal.

It's possible that Aurora won't enjoy the big bounce that some of its peers did after listing on U.S. exchanges. For one thing, Aurora already claims a market cap of nearly $10 billion. The company also has received considerable publicity in the U.S., thanks to reports last month that Coca-Cola was interested in a partnership to develop cannabis-infused beverages.

Aleafia, on the other hand, is still relatively small -- its market cap is below $350 million. The company hasn't had nearly the same level of exposure to U.S. investors that Aurora, Canopy, Cronos, or Tilray have had. These factors could increase the likelihood that Aleafia's share price jumps after its Nasdaq listing.

Are they buys?

Buying a stock just because it lists on a major U.S. exchange isn't a smart idea. Plenty of stocks that list on the NYSE and Nasdaq perform poorly. Sure, Aurora and/or Aleafia could experience boosts from the attention they receive from their new listings. But these increases will be only temporary if there aren't more compelling growth drivers for the stocks.

The good news is that both Aurora and Aleafia definitely have solid opportunities for revenue growth. Canada's recreational marijuana market opens on Oct. 17, 2018. International medical marijuana markets could provide even greater potential over time.

The bad news is that expectations for tremendous growth are already baked into the share prices for both Aurora and Aleafia. And while the Canadian recreational marijuana market likely will grow rapidly, within a few short years there will almost certainly be a supply glut. That could cause major problems for small players like Aleafia.

It could also present challenges for big marijuana producers, including Aurora. The company's executives are shrugging off any concerns about a supply glut, pointing to the expanding market for medical marijuana across the world. However, it's quite possible -- perhaps even probable -- that these markets won't grow as quickly as needed to absorb the surplus capacity in place when supply outstrips demand in Canada.

In my view, Aurora Cannabis and Aleafia Health could be pretty good short-term plays, thanks to their upcoming U.S. stock exchange listings. But for long-term investors, I think there are better opportunities available to capitalize on the tremendous growth in the cannabis industry.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

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