Marijuana stocks have fallen from their February highs, but New York state in March legalized cannabis, opening up what could be a massive weed market on the East Coast. Does that make any pot stock a good buy now?
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The cooldown follows a whirlwind of bullish signs for the cannabis industry.
On Feb. 27, Virginia lawmakers approved legislation that would legalize recreational use of marijuana by 2024. With President Joe Biden in the White House, a Democrat-controlled House and a 50-50 split in the Senate, marijuana stocks began to recover some of the losses they endured over the past two years, when cash concerns and a lack of profit turned investors away.
There were also signs last month that marijuana stocks got swept up in the Reddit-driven surge that took GameStop (GME) for a ride this year. Exactly how much is unclear, as are the identities of any investors.
Also in February, Senate Majority Leader Charles Schumer and Sens. Cory Booker and Ron Wyden also signaled they would make cannabis reform a priority this year. Industry executives said that Jazz Pharmaceuticals‘ (JAZZ) planned acquisition of GW Pharmaceuticals (GWPH), which makes drugs derived from cannabis, added to the mainstream acceptance.
The House voted to pass the MORE Act in December, and on Election Day, five states voted to legalize cannabis in some form.
Cannabis industry executives also predict a domino effect — with neighboring states feeling pressure to legalize in order to prevent a flight of tax revenue to newly legal states. And they say having more legal states increases the likelihood the government will take action to roll back restrictions on a national level.
However the marijuana industry’s finances are, in many ways, still a mess, even as the worst of the risk appears to subside for now. And profitability for most companies has been hard to come by.
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Broader Cannabis Industry Struggles
IBD has mainly focused on the Canadian marijuana stocks, like Canopy Growth (CGC) and Tilray (TLRY), that trade on major U.S. exchanges. Other stocks, like Innovative Industrial Properties (IIPR) and Akerna (KERN), are based in the U.S. but don’t sell cannabis directly.
U.S.-based operators that do grow and sell cannabis, like Curaleaf (CURLF) and Green Thumb Industries (GBTIF), trade over the counter.
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, might not be done cutting costs.
Layoffs, executive departures and steep write-downs have been common among the top Canadian players. Big producers like Canopy Growth and Aurora Cannabis (ACB) scaled back operations.
Andrew Carter, an analyst who covers marijuana stocks at Stifel, has said Canada’s big pot producers face price competition as rivals roll out cheap weed brands to compete with the illicit market.
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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. The EPS Rating measures profit growth.
Innovative Industrial Properties, a real estate investment trust that leases to cannabis companies, leads among the marijuana stocks mentioned here. It has a 95 EPS Rating out of a best-possible 99.
At the low end, Canopy Growth, Cronos Group (CRON) and Aphria (APHA) have EPS ratings in the single digits.
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Marijuana Stocks’ Technicals
Throughout much of 2019 and 2020, marijuana stocks fell on disappointing financial results. However, the Composite Ratings for pure-play marijuana stocks listed on the major U.S. exchanges are improving. The best rating for a pure-play pot producer currently goes to Hexo (HEXO), which has a rating of 83. Tilray stock had a rating of 81.
Innovative Industrial Properties has an 88 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 moved higher since the election. But they have fallen after spiking in February.
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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, and that are breaking out of proper bases, IBD’s research shows.
Aphria Stock Chart
Aphria stock jumped on Jan. 14 after the company reported quarterly sales that beat expectations. However, one analyst expressed concern about slowing cannabis sales growth.
The advance higher meant the stock was extended from a base with an 8.98 buy point. It has not settled into any newer base pattern since.
Aphria and rival Tilray (TLRY) announced plans to merge in December. The $3.9 billion merger would create the largest Canada-based weed company by revenue, the companies said. But some analysts questioned whether it was the right fit.
Cronos Stock Chart
Cronos Group stock is still extended from any entry. The company in February reported a Q4 per-share loss that was far bigger than expected.
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 had been Cronos’ top executive, was appointed executive chairman.
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. The company’s Canadian market share remains small.
Canopy Growth Stock Chart
Of all the pure-play U.S.-listed marijuana stocks, Canopy Growth stock is worth the most, with a market value of around $12.1 billion.
In February, after the company reported fiscal third-quarter results, CEO David Klein said Canopy could enter the U.S. legal market for THC products “during calendar 2021,” provided legislation allowed it.
Canopy, 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. It has a deal in place to buy U.S. cannabis operator Acreage Holdings. It also has a CBD business in the nation.
“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,” Klein said.
Under Klein’s leadership, the company has worked to undo the growth 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 and concerns about over-expansion piled up, he was ousted in 2019.
Tilray Stock Chart
Tilray is well extended from a consolidation with a 12.25 entry. The company’s results, reported in February, beat some expectations. It also became the rare company to deliver on its profitability targets — albeit by an adjusted figure.
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 in 2019.
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.
Aurora Cannabis Stock Chart
Of the marijuana stocks named here, Aurora Cannabis has the weakest Composite Rating. That rating stands at 35.
In February, the company reported sales that were better than expected. But its per-share loss was far worse than anticipated.
Aurora has also said it would focus more on its premium products, while closing some facilities. Aurora announced a new CEO in September.
Innovative Industrial Properties Stock Chart
Innovative Industrial Properties buys properties from pot growers and then leases them back. Its fourth-quarter earnings missed estimates.
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.”
IIPR stock is extended from a three-weeks-tight pattern with a 165.09 buy point. The stock cleared a short consolidation with a 199.45 buy point. But it was back below that entry in March.
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 is one such option. The AdvisorShares Pure Cannabis (YOLO) ETF and the Cambria Cannabis ETF (TOKE) are others.
However, none of those ETFs are in any base pattern.
Are Marijuana Stocks Buys Right Now?
Federal legalization in the U.S. and other markets isn’t guaranteed. Profits are still inconsistent. No Canadian player has a huge market share. It’s not clear which marijuana stocks will be longer-term winners.
So are marijuana stocks a good buy right now? Based on IBD’s research, no. None are currently in buy range.
Investors who are particularly eager to get into the sector could pick up marijuana stocks that are in buy zones.
The earnings outlook also 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.
Ideally, IBD’s research shows, investors would be better served looking for stocks with better profitability ratings and that have moved into buy zones.
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