Marijuana stocks have moved higher as hopes increase for wider U.S. legalization, but fell sharply on Feb. 11. Does that make marijuana stocks good buys now?
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With President Joe Biden in the White House, a Democrat-controlled House and a 50-50 split in the Senate, marijuana stocks have begun to recover some of the losses they endured over the past two years, when losses and cash concerns turned investors away.
More recently, there have been signs that marijuana stocks have gotten 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.
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 have also predicted 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. And profitability has been hard to come by.
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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. Having money in the bank is still 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.
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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.
Innovative Industrial Properties (IIPR), a real estate investment trust that leases to cannabis companies, leads with a 71 EPS Rating out of a best-possible 99.
At the low end, Canopy Growth, Cronos Group, Aphria (APHA) and Aurora Cannabis 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 Cronos Group stock, which stood at 90 out of a best-possible 99.
Innovative Industrial Properties has a 92 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.
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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 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.
Aphria and rival Tilray (TLRY) announced plans to merge in December. The $3.9 billion merger would create the largest multinational weed company by revenue, the companies said. But some analysts questioned whether it was the right fit.
Cronos Stock Chart
Cronos Group stock vaulted from its 10-week line in January. While it fell on Feb. 11, it is still extended from any 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 had been Cronos’ top executive, was appointed executive chairman.
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
Despite the broader sector retreat, Canopy Growth stock is still at highs not seen since 2019. The stock remains extended after rebounding from a pullback to the 50-day line. Of all the pure-play U.S.-listed marijuana stocks, it is worth the most, with a market value of around $15 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, and 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 expansion 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 in 2019.
Tilray Stock Chart
Prior to the sector drop, Tilray stock rebounded powerfully from its 10-week line. But it is well extended from a consolidation with a 12.25 entry.
In November, Tilray 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 2020.
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 63.
In February, the company topped fiscal Q2 estimates as sales rose 11% to 70.3 million Canadian dollars. That was sharp improvement from November, when 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. The company is also trying to close smaller facilities.
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.”
IIPR stock is extended from a three-weeks-tight pattern with a 165.09 buy point. Shares were just out of range from another short consolidation with a 199.45 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, also fell sharply on Feb. 11. But it is still extended from a 16.36 entry.
The AdvisorShares Pure Cannabis (YOLO) ETF is extended but still near record highs.
The Cambria Cannabis ETF (TOKE) debuted in July 2019 and has been on a tear since the start of the new year.
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.
But are marijuana stocks a good buy right now? Investors who are particularly eager to get into the sector could pick up marijuana stocks that are in buy zones. None are currently in buy range. Investors attempting to ride any kind of retail-driven spike could end up getting burned.
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 profitability ratings and that have moved into buy zones.
Check out IBD Stock Lists and other IBD content to find dozens of the best stocks to buy or watch.
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