Trends Influencing Marijuana Stocks

IBD only has ratings for marijuana companies in Canada trading on the big U.S. exchanges — Cronos stock, Canopy stock, Tilray stock, Aurora Cannabis (ACB), Aphria (APHA) and CannTrust(CTST). IBD also tracks stocks related to the marijuana industry, like Innovative Industrial Properties (IIPR), a real estate investment trust that puts its money behind real estate space related to the medical marijuana industry. Innovative Industrial Properties stock currently gets the highest rating of the eight companies.

Investors believe some of those companies are worth north of a billion. Analysts — and, certainly, executives — say cannabis has the 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 and tobacco companies.

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.

However, executives in Canada have warned that shortages there could last through at least 2019, as companies struggle to meet domestic and international demand. Packaging and advertising restrictions make it difficult to stand out in pot shops.

Marijuana Stocks Fundamentals

Earnings growth, or at least the prospect of strong earnings, is a hallmark of top stocks. But, broadly, the marijuana industry is losing money. Billion-dollar valuations dwarf million-dollar quarterly sales figures.

Take, for instance, Aurora Cannabis (ACB). Cowen analysts believe Aurora Cannabis (ACB) could be "among the first Canadian cannabis companies to reach profitability." Aurora, when it reported fiscal second-quarter results in February, said it believed it captured around a fifth of Canada's recreational sales.

Net sales came in at $54 million, an 83% increase from the prior quarter and a 363% jump over the period a year ago.

On one hand, sales growth of 25% or more is generally favored by IBD. However, Aurora's loss attributable to common shareholders deepened to 237.8 million Canadian dollars, compared to a 7.7 million Canadian-dollar profit a year ago.

Canopy Growth, when it released quarterly results in February, reported a per-share loss that was worse than some analysts expected. Cronos Growth reported a wide loss in March.

Not surprisingly, marijuana stocks have poor Earnings Per Share Ratings. Aphria stock leads with a 65 EPS rating out of a best-possible 99. Canopy stock has a 32 EPS rating. Tilray stock has a 2.

The 'Press Release Multiple'

Cronos Growth, a cannabis producer in Canada, became the first company to list on a major U.S. exchange in early 2018. Other Canadian producers followed. But over the rest of the year, and into 2019, those marijuana stocks flailed.

Marijuana stocks charged higher in the days before recreational pot sales began in Canada. Then they sold off. Narbe Alexandrian, president of cannabis investment firm Canopy Rivers, joked in an interview that the stocks still trade on a "press release multiple," in which a single, sudden announcement from a company implying any move-making at all can launch its stock higher.

The stocks also had their own company-specific ascents or meltdowns. In the summer of 2018, after its CEO gave an interview with Jim Cramer, Tilray stock reached the nosebleed territory of 300. The gains evaporated just as fast.

Aphria was accused of self-dealing by short sellers. Cronos stock, which ran steadily higher after landing an investment deal from tobacco giant Altria (MO), got hit with analyst downgrades.

Marijuana Stocks Technicals

The Composite Ratings for marijuana stocks listed on the major U.S. exchanges, as of April 2019, aren't great. The best rating for a pure-play pot company went to Aphria stock, which stood at 84 out of a best-possible 99. 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.

Aurora Cannabis (ACB), another producer in Canada, had a Composite Rating of 69. All other marijuana stocks on the New York Stock Exchange or Nasdaq: Cronos, Tilray, Canopy and CannTrust (CTST) — have ratings below 60.

The relative strength lines of the marijuana stocks, which measure their performance against the broader S&P 500, have flattened or faltered.

Marijuana Stocks' Meandering Chart Patterns

Through 2018 and 2019, the big U.S. exchanges' marijuana stocks occasionally forged, but quickly lost, 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 investors before more sustained support comes in.

As of April, no marijuana stock had a proper base or buy point.

Cronos Stock Chart

As of early April, Cronos stock had cut below its 50-day line, after analysts worried that a prior run-up wasn't justified. Cronos stock hit a high of 25.10 on Feb. 4.

Canopy Stock Chart

Canopy Growth, as with other marijuana stocks, hit its high on Oct. 16, the day before Canadian recreational sales began. Canopy stock plunged late last year then, then rebounded from late December to early February, before pulling back again. The stock as of April was trying to find support at its 50-day line.

Canopy Growth is probably best known for the $4 billion investment it received from beer-and-wine company Constellation Brands (STZ).

Tilray Stock Chart

Tilray stock has trailed lower in recent months. Jefferies analyst Owen Bennett in March argued that Tilray lagged rivals in the medical marijuana market. He also said investors might be putting "too much value" on its beverage and retail partnerships.

Aurora Cannabis Stock Chart

Aurora Cannabis stock also peaked the day before the dawn of Canada's recreational sales. It fell, then recovered afterward. The stock jumped in March after the company appointed activist investor Nelson Peltz as a strategic advisor.

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. Aphria stock rebounded to 10.95 on Feb. 4 and has since drifted lower.

CannTrust Stock Chart

CannTrust, another Canadian pot company, listed on the New York Stock Exchange in February. The stock has largely fallen since the listing.

Innovative Industrial Properties Stock Chart

Innovative Industrial Properties began trading in 2016 and has run higher since. It has a 98 Composite Rating and an EPS rating of 80. While the stock wasn't in a buy zone, its relative strength line was rising. The stock cleared a consolidation pattern in January.

Marijuana Industry ETF

Amid the volatility in marijuana stocks, one way to avoid stock-specific risk is via ETFs. The ETFMG Alternative Harvest ETF (MJ) tracks the marijuana industry.

The ETF actually formed a proper buy point earlier this year, a 38.45 entry from a deep cup-with-handle base. In March, MJ tried to break out but then pulled back.

Bottom line, marijuana stocks are worth watching, but they are not a good buy right now, based on IBD's metrics. Investors, IBD's research shows, should look for stocks with strong fundamentals and breaking out of proper bases.

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