Are Any Marijuana Stocks Good Buys As Industry Consolidates?

Canadian marijuana stocks have fallen from their February highs. But one player in the industry, Tilray (TLRY), got a lot bigger after completing its merger with Aphria. Does that make any pot stock a good buy now?


Tilray and Aphria announced plans to merge in December. While consolidation has tightened up operations in other industries, some analysts questioned whether the deal was the right fit, as the industry still loses money and the U.S. becomes a bigger focus for investors.

Moreover, marijuana stocks also slid after Aphria last month reported results that missed expectations, citing issues with coronavirus lockdowns. The results, some analysts said, set the stage for what could be a tough round of earnings for the cannabis industry in Canada, which is grappling with a spike in cases and new quarantine measures.

Still, the cooldown follows a whirlwind of bullish signs for the cannabis industry.

More states, like New York and Virginia, are legalizing. 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. 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.

However, with Joe Biden in the White House and Democrats in 50 Senate seats, anticipation over wider U.S. legalization has grown. Federal legalization aside, some U.S.-based cannabis operators that do business in legal states are already bringing in sales far above those of some of their well-hyped Canadian counterparts.

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 94 EPS Rating out of a best-possible 99.

At the low end, Canopy Growth has an EPS Rating of 5.

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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 have improved. The best rating for a pure-play pot producer currently goes to Hexo (HEXO), which has a rating of 71. Tilray stock had a rating of 60.

Innovative Industrial Properties has an 94 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.

Cronos Stock Chart

Cronos Group 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 $9.6 billion. Canopy recently agreed to acquire Supreme Cannabis, even as it loses money and scales back elsewhere.

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 has a deal in place to buy U.S. cannabis operator Acreage Holdings and has a CBD business here as well.

“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 in November.

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’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

In February, Aurora Cannabis 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 currently consolidating with a 222.18 entry. The stock is trading around 180.

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.

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 happen to enter into 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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