Canadian marijuana stocks that trade on major U.S. exchanges fell after the House voted to pass the MORE Act, which would remove marijuana from the list of controlled substances. Does that make those marijuana stocks good buys now?
The vote, in early December, came after New Jersey, Arizona, Montana and South Dakota on Election Day approved ballot measures to legalize recreational marijuana. South Dakotans also backed creating a medical marijuana program for people with severe medical conditions. Mississippi voters approved legalizing cannabis for medical use.
After President-elect Biden’s transition formally began, marijuana stocks jumped again. Biden has said he supports federal marijuana decriminalization.
Cannabis-industry executives have also predicted a domino effect — with newly legal states pressuring neighboring states to legalize in an effort to prevent a flight of tax revenue. And they say more legal states increase the likelihood the government takes action to roll back restrictions on a national level.
Still, the MORE Act faces little hope in the Senate. The bill decriminalizes cannabis on a federal level but lets states decide their own laws. Other legal reform could be dampened if the GOP holds onto the Senate, where two runoffs set for January will ultimately determine the balance of the chamber. The marijuana industry’s finances are, in many ways, still a mess.
Broader Cannabis Industry Struggles
Before the election, and before the coronavirus pandemic, analysts predicted a tough stretch ahead for marijuana stocks, as cash and financing dried up.
Efforts by Canada’s big pot companies to tap the U.S.’ market for hemp, which is legal, and CBD, which comes from hemp, haven’t always worked. New executives, focused more on balance sheets than startup swagger, aren’t done cutting costs.
Layoffs, executive departures and steep write-downs have been common among the top Canadian players. Big producers, like Canopy Growth (CGC) and Aurora Cannabis (ACB), scaled back operations. The pandemic is still coursing through North America. Money in the bank will become more crucial.
Andrew Carter, an analyst who covers marijuana stocks at Stifel, has said Canada’s big pot producers face increasing price competition, as rivals roll out cheap weed brands to compete with the illicit market.
As the coronavirus pandemic leaves the economy — and service levels at pot dispensaries — in flux, investors and analysts have focused more on which companies have enough cash to ride out the stoppages.
Analysts have pointed to marijuana stocks like Canopy Growth and Cronos Group (CRON) as having healthy cash positions, thanks to big investments from Constellation Brands (STZ) and Altria (MO), respectively. Bank of America analysts in March called Aphria (APHA) a solid defensive play, citing its cash cushion.
Marijuana Stocks Fundamentals
Earnings growth, or at least the prospect of strong earnings, is a hallmark of top stocks. But the marijuana industry, broadly, is losing money. Not surprisingly, marijuana stocks have poor Earnings Per Share Ratings.
Innovative Industrial Properties (IIPR) leads with a 74 EPS Rating out of a best-possible 99. In July, the cannabis-focused real-estate investment trust became the rare pot stock to make the IBD 50 Stocks To Watch list.
At the low end, Cronos Group, Aphria and Aurora Cannabis have EPS ratings of 7, 7 and 3, respectively.
Marijuana Stocks’ Technicals
Throughout much of 2019 and 2020, marijuana stocks have fallen on disappointing financials. The Composite Ratings for pure-play marijuana stocks listed on the major U.S. exchanges mostly aren’t great. The best rating for a pure-play pot producer currently goes to Canopy Growth stock, which stood at 80 out of a best-possible 99.
Innovative Industrial Properties has a 97 Composite Rating, the best overall.
IBD research says investors should focus on stocks with Composite Ratings higher than 90. The Composite Rating is a broad measure of a stock’s performance, including earnings and various technical factors.
The relative strength lines of most marijuana stocks, which measure their performance against the broader S&P 500, have nudged higher since the election.
Marijuana Stocks’ Chart Patterns
When a stock dips or flattens out into a base after a charge higher, that can indicate that investors are taking a breather, shaking out bearish traders before more sustained support comes in.
Investors should also look for stocks with strong fundamentals that are breaking out of proper bases, IBD’s research shows.
Aphria Stock Chart
Carter, the marijuana stocks analyst at Stifel, in July upgraded shares to buy.
“We find a discount multiple for the shares which we believe undervalues its improving growth prospects,” he said. “We estimate robust sales growth validated by consistent market share gains complemented by profitability, disciplined capital allocation, and progressive capital structure management.”
Cronos Stock Chart
Cronos Group shares are trying to get back into buy range of a consolidation with an 8.23 entry.
As with other marijuana stocks, Cronos has undergone changes at the top. The company in September said it had appointed Kurt Schmidt as its new CEO. Mike Gorenstein, who’d been Cronos’ top executive, was appointed executive chairman.
In August, Cronos reported a steeper-than-expected second-quarter loss. Lower pot prices in Canada and coronavirus-related store closures in the U.S. triggered millions in impairments and write-downs.
After consolidating through July, Cronos Group stock fell hard on the earnings report. The company has also racked up costs related to a review of last year’s financial results. That review concerned purchases and sales made through its business-to-business channel.
Cronos Group in November reported third-quarter results that beat estimates.
Cronos has a CBD business in the U.S., via the acquisition of Lord Jones. But the pandemic has kept people from physical stores that might sell the substance. Canadian pot companies have said U.S. retailers expressed reluctance to sell CBD products after the FDA began cracking down on some sales.
Canopy Growth Stock Chart
Canopy Growth stock is extended from a consolidation with a 22.29 buy point. Of all the pure-play U.S.-listed marijuana stocks, it is worth the most, with a market value of $10.1 billion.
The company, when it reported fiscal second-quarter earnings in November, said it would channel products through its U.S. infrastructure when U.S. marijuana laws allowed it.
“We’ve already developed a U.S. ecosystem that positions us well as a hemp and cannabis powerhouse — when, not if, U.S. permissibility happens,” CEO David Klein said.
Canopy also said its market share in Canada had increased, as more pot shops opened there. And it said it was “firmly on a path” to hit positive adjusted EBITDA at some point next fiscal year. EBITDA stands for earnings before interest, taxes, depreciation and amortization.
The company, when it reported first-quarter results in August, said it was seeing “improved sales velocity and market share performance,” after losing ground in Canada’s recreational weed market in the fourth quarter.
The company also said its cheap pot brand, TWD, made up a bigger sale percentage of its flower — or dry bud — products.
When Canopy reported results for the prior quarter, management said they didn’t move quickly enough to capture more of the cheap weed market.
Under the leadership of Klein, the company has worked to undo the efforts of former CEO Bruce Linton. Linton tried to expand globally into early, undeveloped cannabis markets and strike big, headline-grabbing deals elsewhere. But as losses piled up, he was ousted last year.
Tilray Stock Chart
Tilray in November reported third-quarter sales that missed expectations. But its loss was narrower than expected. The company said it was “poised to deliver positive or break even” adjusted EBITDA in the fourth quarter of this year.
Tilray has been trying to grow sales via its international medical marijuana business, its Canadian recreational business, and its hemp food business, which comes from Manitoba Harvest. Tilray acquired Manitoba Harvest last year.
However, Tilray said it was waiting for more clarity on FDA regulations before advancing into the U.S. CBD market. And it noted that restrictions related to the coronavirus pandemic could rattle business in the European Union, where some nations have legalized medical cannabis.
Second-quarter results, reported in August, missed expectations. The stock is off lows reached in March, but has largely fallen since its 2018 IPO.
In May, Tilray said its High Park Gardens subsidiary would shut down over the next six weeks. The company made the move in an attempt to cut costs.
Tilray had to book millions in impairments for a deal it struck last year with marketing and entertainment company Authentic Brands Group. That arrangement would put Tilray-made CBD foot balms and beauty products in mainstream retailers.
“Given the uncertainty of the FDA stance on the sale of CBD products in the U.S., we concluded the near-term expectations for sales under this agreement did not support our balance sheet value,” Tilray CFO Michael Kruteck said in May.
Aurora Cannabis Stock Chart
Of the marijuana stocks named here, Aurora Cannabis has the weakest Composite Rating. That rating stands at 8.
In November, Aurora reported falling quarterly sales, and said it was “not satisfied” with its Canadian recreational business. It also said it would focus more on its premium products. Analysts, as they have in the past, expressed concerns about the company’s cash burn and cash balance.
In September, Aurora announced a new CEO. Later in the month, Aurora forecast falling cannabis sales. It took a non-cash write-down of goodwill and intangible assets of 1.6 billion Canadian dollars. For the full fiscal year, it lost 34 Canadian dollars per share.
The company is trying to close smaller facilities. But Bill Kirk, an analyst with MKM Partners, still said demand was lacking.
In a research note about Aurora in September, he said: “Please Stop Growing So Much Weed.”
He added that there was no demand for the 35,000 kilograms of pot the company expects to grow, on average, per quarter.
“Aurora grows more stuff that people don’t want than they grow stuff people want,” he said in a research note. “While Aurora’s cost to grow is low, it would be more noteworthy if a larger percentage of the harvests were sellable.”
In July, Aurora said it would cut staff in Europe and shrink other operations there.
Innovative Industrial Properties Stock Chart
Innovative Industrial Properties buys properties from pot growers and then leases them back. Roth Capital has said in a research note that more purchases were likely ahead. The real-estate investment trust, it said, will try to lock in gains before potential federal reforms open up more banking and financing options to the cannabis industry.
Roth said “the sale-leaseback model remains the nondilutive capital raising method of choice for many operators and (Innovative Industrial) remains the industry leader with unmatched access to capital compared to its peers.”
Shares fell on Nov. 6 and 9, even as other marijuana stocks jumped on those days. The stock is extended from a three-weeks-tight pattern with a 165.09 buy point.
Marijuana Industry ETFs
Amid the volatility in marijuana stocks, one way to avoid stock-specific risk is via ETFs. The ETFMG Alternative Harvest (MJ) ETF, which tracks the cannabis industry, has also rebounded. Shares are close to clearing a consolidation with a 15.44 entry.
The AdvisorShares Pure Cannabis (YOLO) ETF was extended from a cup-with-handle base with a 12.79 buy point.
Are Marijuana Stocks Buys Right Now?
The coronavirus pandemic will be a crucial test of how much people want, or need, weed if the economy endures further suffering. It’s not clear which marijuana stocks will be longer-term winners. Profits are still inconsistent. Federal legalization in the U.S. and other markets isn’t guaranteed.
But are marijuana stocks a good buy right now? Probably not.
Investors who are particularly eager to get into the sector could pick up marijuana stocks that are consolidating once they clear their current patterns and enter into a buy zone. But the earnings outlook remains tough, and the legalized pot market continues to face challenges from illicit suppliers. Even as hopes for reform grow, the sector is still volatile. Stocks that were in buy zones have quickly become extended.
Ideally, IBD’s research shows, investors would be better served looking for stocks with better fundamentals and that are closer to their highs.
Check out IBD Stock Lists and other IBD content to find dozens of the best stocks to buy or watch.
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