Cannabis has been illegal at a federal level in the US since 1970, when the Controlled Substances Act was passed by the Congress. Things started to change in 1996, when California became the first state to legalize medicinal use of marijuana. Since then it has been a long and treacherous road, but most states (35 to be more exact) have legalized the medical use of cannabis. In 2012, Colorado and Washington became the first states to legalize recreational use of cannabis and some other states follow suit. Currently, 15 states legalized the recreational use of cannabis and in 16 other states the consumption for recreational purposes is de-criminalized, and more reforms in this area are expected in the nearest future. In the latest election, on November 3, four states voted to legalize cannabis: Arizona, New Jersey, Montana, and South Dakota.

Due to the increasing popularity of legalization for both medical and recreational use, there is more and more talk about the federal legalization, which would have many benefits. For one, a legalization on a federal level, would allow both consumers and businesses to cross state lines without breaking the federal law. At the same time, a federal legalization bill would establish a clear set of laws and regulations for all states to follow. This in turn, would make it easier for businesses to operate across various states.

While a federal legalization bill is long overdue (with estimated 70% of US adults saying marijuana should be legal, according to surveys), the Congress seems in no hurry to pass it, despite several initiatives that reached various levels of success. The latest one, called the Marijuana Opportunity Reinvestment and Expungement Act, or MORE Act, is expected to be debated and voted on by the House after the Thanksgiving holidays.

Despite the illegality of cannabis on a federal level, investors have obtained the opportunity to invest in various cannabis and cannabis-related stocks over the years. However, not so long ago the best exposure to the cannabis industry was through murky OTC stocks or some larger companies whose one subsidiary had some tangential relationship with cannabis or cannabinoids (compounds in the cannabis plant). In the last several years, things changed and quite dramatically. The legalization of cannabis in Canada meant that large companies could list on NYSE and NASDAQ. The legalization of industrial hemp at a federal level in the US through the 2018 Farm Bill, allowed companies that are working with CBD to list their shares (see 25 biggest marijuana companies).

We at Insider Monkey have decided to look at NYSE- and NASDAQ-listed cannabis companies through the prism of their popularity among hedge funds we are following. We are doing that because our research shows that hedge fund sentiment plays a very important role in identifying stocks to invest in. We have been able to identify in advance a select group of stocks that hedge funds were invested in and that group has outperformed the market by more than 66 percentage points since March 2017 (see more details here). If you want to keep track of our research and be informed about the latest trends among hedge funds, make sure to subscribe to our free newsletter and receive our stories in your inbox:

So, having said that, let’s take a look at the best cannabis stocks to buy using our hedge fund sentiment scores. As a side note, we should mention that our picks for this article only include companies that are closely tied to cannabis plant, i.e. whose core business is dependent on it, rather than companies whose products or services are related to the industry.

10. OrganiGram Holdings Inc (NASDAQ:OGI)

The first stock on our list is OrganiGram Holdings Inc (NASDAQ:OGI), in which four investors from our database held shares at the end of September. The total value of their positions amounted to just $1.9 million, of which the largest holding can be found in Israel Englander’s Millennium Management portfolio. Millennium disclosed holding nearly 1.53 million shares worth $1.61 million in its latest 13F filing.

OrganiGram is a Canadian-based licensed producer of cannabis and is one of the several companies to be included in this list, so it’s probably worth doing a bit of an overview about where the Canadian cannabis industry is at. While legalizing weed in 2018 was met with high expectations, two years in, the industry continues to struggle. Part of the blame belongs to the Government and provincial regulators, which messed things up by delaying the launch of products like edibles and beverages and complicating things in the licensing department. However, most of the blame lies on companies, which invested heavily into expansion and M&A without a proper analysis of the market. That’s why most if not all Canadian Licensed Producers (LPs) have not turned profitable on a regular basis.

Organigram Holdings has missed three of the previous four estimates. For the fiscal third quarter, the company posted a loss of $0.38, which was significantly higher than the expected loss of $0.03. On November 30, the company reported its financial results for the fiscal fourth quarter, with net loss of $0.20 missing the estimates by $0.17. However, the revenue of $20.40 million went up by 25% on the year and was $5.0 million higher than expected.

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9. Sundial Growers Inc (NASDAQ:SNDL)

Sundial Growers Inc (NASDAQ:SNDL) is another Canadian LP that made the list, as six hedge funds we follow disclosed a stake in this company with a total value of their positions amounting to more than $4.0 million. It’s worth mentioning that Sundial Growers is the only company in this list which saw an increase in popularity during the third quarter of 2020. At the end of June, only three investors were bullish on the stock. The growth of Sundial Growers Inc (NASDAQ:SNDL)’s popularity can mainly be attributed to two funds: Sander Gerber’s Hudson Bay Capital Management and Jim Simons’ Renaissance Technologies, which acquired new positions in Sundial Growers between the end of June and the end of September, although Hudson Bay’s stake is worth $3.13 million, accounting for the bulk of all hedge funds holdings.

Sundial Growers reported its last quarterly results on November 11 posting a net loss of C$71.4 million ($55 million), which includes impairment provisions worth C$79.9 million. It also reported a net revenue of C$12.87 million, which was down by 54% on the year and by 36% on the quarter. However, Sundial Growers Inc (NASDAQ:SNDL) also reported an increase in branded net cannabis sales, a decreasing cost of per gram and lower SG&A costs. Sundial also entered into a financial restructuring in June and managed to eliminate C$100 million of debt so far this year and currently has C$127 million of outstanding debt.

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8. Tilray Inc (NASDAQ:TLRY)

Tilray Inc (NASDAQ:TLRY) is next in line with also six funds holding long positions as of the end of September. Over the third quarter, the number of investors bullish on Tilray slid by five as the stock lost more than 30%. For the quarter ended September 30, Tilray posted a net loss of $2.3 million, which was substantially lower than $36.4 million a year earlier. The company’s revenue remained flat over the year and amounted to $51.4 million due to the elimination of bulk sales, which offset the growth in Canadian and International markets. Tilray Inc (NASDAQ:TLRY) also ended the third quarter with a cash balance of $155.2 million. In addition, recently Tilray has announced entering into exchange agreements to convert some its Senior Notes worth around $73 million into $6.4 million worth of its class 2 common stock.

Among Tilray Inc (NASDAQ:TLRY)’s largest investors from our database, we can mention Himanshu Gulati’s Antara Capital and Robert Henry Lynch’s Aristeia Capital, which disclosed holding convertible bonds worth $48.3 million and $20.06 million respectively. Israel Englander’s Millennium Management reported a stake containing 36,250 shares worth $15.23 million in its latest 13F filing.

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7. Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE)

Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE) is one of two cannabinoid-focused pharmaceutical companies in our list of best cannabis stocks to buy. A total of seven funds from our list disclosed holding $2.6 million worth of Zynerba stock at the end of September, down from 12 funds a quarter earlier. Among the largest shareholders in our database is Prentice Capital Management, led by Michael Zimmerman, which owns 390,381 shares and Millennium Management with a holding of 197,080 shares.

Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE) focuses on transdermal cannabinoid therapies for rare and near-rare neuropsychiatric disorders, such as Fragile X syndrome and autism spectrum disorder, among others. Its lead product candidate is Zygel, a CBD-based gel, which has completed pivotal trial for Fragile X Syndrome and the company is expecting a meeting with the FDA to discuss the path forward. In addition, Zygel is also being in different stages of trial for other disorders. As of yet, Zynerba has not disclosed any revenues and for the third quarter of 2020 its net loss widened to $0.31 per share from $0.08 per share a year earlier. On the other hand, Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE) has assured investors in its latest financial report that it has enough cash and cash equivalents to fund its operations and capital requirements until the end of the fourth quarter of 2021.

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6. Aphria Inc (NASDAQ:APHA)

Aphria Inc (NASDAQ:APHA) ranks on the sixth spot in our list of hedge funds’ favorite cannabis stocks. At the end of September, eight funds from our list held shares of Aphria Inc (NASDAQ:APHA), with William Harnisch’s Peconic Partners leading the list with an $8.93 million position (the total value of all funds’ holdings amounted to $11.24 million). Since the beginning of the year, Aphria’s stock appreciated by more than 50% as the company delivered strong financial results.

More recently, Aphria Inc (NASDAQ:APHA) has announced the acquisition of US-based craft beer maker SweetWater Brewing Company for $250 million in cash and $50 million in stock. The acquisition will provide Aphria with the necessary infrastructure to enter the cannabis-infused beverages market in the US.