Cannabis Stocks Advisory
Are Marijuana Stocks Buys Right Now?
February 19 2020 - Marijuana Stocks Are Tumbling — Are Any Good Buys Right Now? By Investors Business Daily
Marijuana stocks received enormous hype after legal recreational sales took hold in Canada and sales became legal in some form or another across more than half of the U.S. Producers in Canada listed on the big U.S. exchanges, while their U.S. counterparts sought listings in Canada. But marijuana stocks in 2019 plunged to lows amid weak results. Are any marijuana stocks on major U.S. exchanges a good buy now?
Overall, the marijuana industry is showing little profit growth as weed producers burn through money to expand. Sales growth, while still large thanks to legalization, has disappointed investors with lofty expectations. An under-supply, and more recently concerns of an oversupply, have hurt business. Aggressive expansion has been followed by layoffs, regulatory run-ins and vows to pull back and focus on profit.
Some analysts and executives argue that the cannabis industry, and any stocks related to it, still has long-term potential for growth. But investors should analyze marijuana stocks like any other investment. Here's a look at how the biggest marijuana stocks stack up, by IBD metrics.
Marijuana Stocks On U.S. Exchanges
IBD only has full ratings for marijuana companies in Canada trading on the big U.S. exchanges. As of February, those marijuana stocks were Cronos Group (CRON), Canopy Growth (CGC), Tilray (TLRY), Aurora Cannabis (ACB), Aphria (APHA), CannTrust (CTST), Hexo (HEXO) and Organigram (OGI). Sundial Growers (SNDL) went public at the beginning of August.
MarketSmith also has limited ratings data for some U.S.-based cannabis companies, like Acreage Holdings (ACRGF) and Curaleaf (CURLF). Those marijuana stocks trade over the counter and in Canada.
IBD also tracks stocks related to the marijuana industry, like Innovative Industrial Properties (IIPR), a cannabis-focused real estate investment trust. Innovative Industrial Properties stock currently gets the highest rating of the companies tracked.
Greenlane (GNLN), a Florida-based company that distributes vaping products and accessories to smoke shops and dispensaries, debuted on the Nasdaq in April. Akerna (KERN), which makes compliance software for cannabis businesses and the agencies regulating them, began trading in June on the Nasdaq. Akerna went public after a merger with a blank-check company, a process that can be quicker and less stringent than an IPO.
Trends Influencing Marijuana Stocks
The bull case laid out for the industry is that there's still potential to take business away from the alcohol and pharmaceutical industries. The marijuana industry also points to the prospect of bigger deals with beverage companies, tobacco companies and nations abroad that are relaxing their marijuana laws.
The legalization of hemp in the U.S. has also led more of those companies — including Tilray and Canopy Growth — to seek arrangements to make hemp in the U.S. or to sell hemp-derived CBD products via mainstream retailers. Such moves could help boost sales and destigmatize cannabis.
Investors, however, haven't been convinced. The sell-off in 2019 has hacked away at those market valuations, as profits remain scarce and choke points on the supply chain — whether at grow facilities or provincial distribution centers or pot shops themselves — hit sales. Bigger questions have surfaced over how much demand is actually there, how much financing is available, and whether a shakeout is on the horizon.
An under-supply of cannabis hurt sales shortly after pot went legal in Canada. As cultivation picked up, the provinces that receive pot producers' weed — en route to retail stores — found themselves amply stocked, and thus bought less. Cannabis-industry executives have said Canada has been too slow to license stores to sell their product, which has also hurt the top line.
As for U.S. CBD sales, Tilray and Canopy, in November, said that many U.S. retailers were waiting for clearer guidance from the FDA before agreeing to sell CBD. The FDA, in November, didn't help, issuing an announcement saying that it "cannot conclude that CBD is generally recognized as safe."
Marijuana Stocks Fundamentals
Earnings growth, or at least the prospect of strong earnings, is a hallmark of top stocks. But the marijuana industry is losing money. The industry's billion-dollar valuations dwarf million-dollar quarterly sales figures.
Not surprisingly, marijuana stocks have poor Earnings Per Share Ratings. Innovative Industrial Properties leads with a 88 EPS Rating out of a best-possible 99. Tilray stock has an EPS Rating of 1, the worst possible.
Marijuana Stocks Technicals
The Composite Ratings for marijuana stocks listed on the major U.S. exchanges, as of February, aren't great. The best rating for a pure-play pot producer went to Cronos Group stock, which stood at 42 out of a best-possible 99. IBD research, however, 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.
All other pure-play marijuana stocks on the New York Stock Exchange or Nasdaq had ratings below 30.
The relative strength lines of most marijuana stocks, which measure their performance against the broader S&P 500, have flattened or faltered.
The one exception on Composite Ratings is Innovative Industrial Properties. It has a 88 Composite Rating.
Marijuana Stocks' Plummeting Chart Patterns
Throughout much of 2019, marijuana stocks fell. None have formed any base 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.
Cronos Stock Chart
As of mid-February, Cronos stock had slipped below support at its 50-day and 200-day lines. In November, Cronos stock hit its worst level since August 2018.
In August, Cronos reported a surprise second-quarter profit. But the company said its losses — as measured by an adjusted earnings figure — would likely get bigger in the second half of the year as it invests in its business.
That figure, known as adjusted EBITDA — or earnings before interest, taxes, depreciation and amortization — went further into negative territory when Cronos reported earnings in November.
Canopy Growth Stock Chart
On Dec. 9, Canopy announced that former Constellation Brands CFO David Klein would become the pot producer's new CEO. Canopy stock jumped on the news. On Dec. 31, Canopy also speared higher, above its 50-day line.
The gains for Canopy stock continued after the company in February reported quarterly results that topped expectations. The results broke a streak of disappointing results.
Tilray Stock Chart
Tilray stock spiked to 300 on Sept. 19, 2018, but it's been all downhill from there for the July 2018 IPO.
Tilray stock got a brief bump in May after its quarterly sales beat expectations. But when Tilray reported second-quarter earnings in August, losses were worse than expected. Same for Tilray's earnings during the third quarter.
Tilray stock spent much of 2019 gliding to new lows. But on Dec. 31, the stock trampolined higher. Shares are also testing support at their 50-day line.
Aurora Cannabis Stock Chart
Aurora Cannabis stock jumped in March after the company appointed activist investor Nelson Peltz as a strategic advisor. The company also reported earnings in mid-May. In September, the company's fiscal Q4 sales missed its own estimates.
Shares fell after March. Aurora Cannabis stock has plunged in November to a two-year low. In December, it fell further on the news that Cam Battley, Aurora's chief corporate officer, had stepped down from that position.
Aurora Cannabis stock fell further after the company's CEO stepped down and it announced layoffs and massive write-downs.
Aphria Stock Chart
Aphria stock listed on the New York Stock Exchange in November 2018. It reached a high of 13.45. But a month later, Aphria stock sank to a low of 3.57 in the wake of a short-seller report that accused the company of running a shell game designed to reward insiders.
Shares have generally trended lower since Aphria's debut. In January, Aprhia stock fell after it cut its full-year sales outlook.
CannTrust Stock Chart
CannTrust, another Canadian pot company, listed on the New York Stock Exchange last year. The stock had largely fallen since the listing.
The company in September was suspended from selling cannabis after disclosing that it grew cannabis in unlicensed rooms.
CannTrust stock, which peaked at 10.17 in March, is trading below 1, right by record lows. In December, CannTrust said it received notice from the New York Stock Exchange that is was falling short of the exchange's listing standards. CannTrust has six months to show it can hold a closing price of at least $1 to come back into compliance.
Innovative Industrial Properties Stock Chart
Innovative Industrial Properties stock began trading in 2016 It has a 88 Composite Rating and an EPS rating of 76. Actual revenue is tiny, but growing in the triple digits. Earnings leapt 126% in the latest quarter.
Innovative Industrial Properties stock in June broke out from a 91.37 buy point.
But after falling during the summer, shares tested support at their 50-day line in November. They dipped below that level through much of December. Through most of January, they have been above that level. That trend continued into February.
Marijuana Industry ETF
Amid the volatility in marijuana stocks, one way to avoid stock-specific risk is via ETFs. However, the ETFMG Alternative Harvest (MJ) ETF, which tracks the cannabis industry, has sailed lower since March. The ETF's 50-day line crossed below its 200-day line in mid-June, a bearish signal.
The MJ ETF hit a record low in November. It rebounded on Dec. 31. In February, the ETF was below its 50-day line.
Are Marijuana Stocks Buys Right Now?
Despite some recent recovery, it's not clear which marijuana stocks will be longer-term winners. Investors could treat marijuana stocks like recent tech IPOs that are growing rapidly but still losing money. But difficulties continue to build up. Wall Street is still searching for the bottom.
So are marijuana stocks a good buy right now? None are currently in buy range.
Marijuana stocks likely won't improve until there is more indication that the marijuana industry is curbing losses and boosting sales. More regulatory clarity also could be helpful.
If and when a marijuana stock sets up and clears a proper buy point, investors could buy it. But investors have to have a high risk tolerance and be ready to cut losses. Marijuana stocks are extremely volatile on an individual and group basis.
Bottom line: Marijuana stocks are not a good buy, according to IBD research.
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