Cannabis stocks took a significant hit during 2019 as concerns about the industry’s negative financial performance, high burn rate and regulatory middle-grounds pushed the price of many important players down, reflecting investors’ sentiment towards a business model that is yet to prove its worth.
So far, one of the most important marijuana stocks indexes, the Global Cannabis Stock Index, which tracks the performance of nearly 30 different publicly traded cannabis producers worldwide, lost around 64 per cent of its value from April 2019 until February 19, 2020, only a day before the coronavirus market crash took place.
It appears that the best cannabis stocks including Aurora Cannabis (ACB), Tilray (TLRY), and Canopy Growth (WEED) were already in trouble before the outbreak hit the stock market, even though this same situation may turn out to be what the industry needed to push sales up, during what would be otherwise a gloomy beginning for this year.
Post-coronavirus performance of marijuana stocks
All top cannabis stocks are currently posting negative year-to-date returns, with Aurora Cannabis and Tilray being the worst performers among them with losses of 57.8 per cent and 60 per cent respectively.
Innovative Industrial Properties (IIPR), on the other hand, has managed to remain relatively stable throughout the year, even after the coronavirus crash, as its shares are delivering a mild 2 per cent loss so far in the year, which is actually a relatively positive result compared to the performance of the S&P 500 for the same period, which has lost nearly 20 per cent of its value.
That said, these top four players are all showing positive five-day returns, as the industry seems to be benefitting from a temporary surge in revenues caused by stay-at-home policies and the fact that some states have declared cannabis stores as “essential medicine” establishments, which allows them to remain open to the public.
From this group, Tilray is definitely emerging as the top winner, as the pot-company’s shares have surged by nearly 70 per cent in the past five days, as investors are probably expecting a windfall of fresh revenues as a result of this latest trend.
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Despite none of the industry’s fundamentals have significantly shifted, investors seem to be confident that the best marijuana stocks may somehow benefit from this short-term revenue growth, even though cash flow and balance sheet concerns remain intact.
Marijuana stock news
A recent report from Prohibition Partners, a company that specialises in market research for the cannabis industry, emphasised that the fact that an economic recession may be about to kick in could be one of the elements driving positive sentiment towards weed stocks, as research has shown that during times of economic distress cannabis consumption tends to go up.
Furthermore, a potential large-scale economic downturn could result in the reorganisation of the cannabis industry, driving smaller players with fewer resources out of business while strengthening those that have the means to withstand the temporary blow, as they would benefit from additional demand coming from clients that used to buy from former competitors.
Marijuana stocks to invest in Spring 2020
Investing in marijuana stocks demands a high-risk-high-reward approach, as this is a groundbreaking industry that has emerged from a public policy shift towards what was previously an illegal activity.
That said, companies in this industry are still shaping their business models to find the most adequate way to produce, distribute, and deliver cannabis products, while they are also perfecting the methods and techniques through which they extract the by-product that is ultimately included in edibles and other CBD-based products.
The following is a brief review of three potential marijuana stocks to watch and invest in spring 2020, including a quick overview of their financials and analysts recommendations.
Tilray revenues have grown dramatically since 2016, jumping from $12m back then to nearly $170m by the end of 2019. Net losses, on the other hand, have also expanded significantly, as the company reported $3.2 in net losses per share last year, which is a result nearly 300 per cent worse than the $0.82 losses reported in 2018.
Additionally, the company’s cash position has deteriorated from 2018 to 2019 due to continuous investments required to grow the business’ operational capacity.
On the other hand, Tilray has secured interesting alliances including an agreement with Sandoz to develop co-branded non-combustible cannabis products and a partnership with ABInBev to innovate in the non-alcoholic beverage segment by introducing products that contain THC and CBD.
Analysts seem to be inclined to rate Tilray’s stock as a “hold”, possibly as they expect that a potential reorganisation of the cannabis industry could end up favouring a player that is already leaving a footprint in this innovative field.
Out of 17 analysts surveyed by CNN Money, 12 rated TLRY as a hold, while four inclined favorably to its mid-term outlook by rating it as a potential marijuana stock to buy in spring 2020.
Aurora Cannabis (ACB)
ACB is another pick from the list of marijuana stocks to invest in spring 2020, considering the company’s strong balance sheet, which could prove useful during a situation of economic distress such as the one the coronavirus has triggered.
The Canada-based company currently has an LTD-to-assets ratio of 27.7 per cent even after deducting the soft assets shown on its balance sheet.
Aurora’s sales have also been growing on a year-on-year basis based on its latest annual report, even though the company continues to generate a negative operating income.
Twelve analysts surveyed by CNN Money rated the stock as a potential hold while three of them rated it as a sell.
Innovative Industrial Properties (IIPR)
While Innovative Industrial Properties is not a company that produces cannabis products directly, it is among the best marijuana stocks to invest in spring 2020. The company has managed to raise nearly $1bn in fresh capital to set up a significant number of marijuana-production facilities that have yielded 13.3 per cent on invested capital, leasing them to third parties that are interested in either starting or expanding their cannabis production capacity by using IIP’s top-of-the-line locations.
The company has managed to accomplish this without undertaking a significant amount of debt, as so far its debt-to-total-gross-assets remains at 19 per cent.
Additionally, the company is already in green territory and has shown consistent growth in both revenues and profits, closing 2019 with $2.06 in earnings per share.
Four out of five analysts following the stock are rating it as a buy, possibly due to the consistent revenue growth shown by businesses in the industry, which should lead to higher rental income and higher profits in the near future.
One downside of IIP shares, on the other hand, is that the stock is trading at nearly 40 times its earnings per share, even after the coronavirus market crash.
This is undoubtedly a high valuation for a small business that still faces significant challenges. It perhaps portrays an overly optimistic outlook on its potential future performance, considering the economic downturn that may result from the virus outbreak.
There have been no significant changes in the fundamentals associated with the cannabis industry so far. Most of the recent positive market sentiment towards pot stocks has been triggered by a situation of temporary nature that shouldn’t be seen as a sustainable driver for positive revenue or earnings growth over the long term.
That said, are cannabis stocks a good buy right now? On an individual level, IIP seems to be a good candidate if the valuation goes down to a more reasonable level, perhaps as a result of another stock market downturn. Meanwhile, on a broad industry-wide level there are no indications that pot companies are a better case for an investment than they were before the outbreak. Follow the latest marijuana stocks’ analysis and spot the best trading opportunities at Capital.com.