In this week’s Marijuana Market Update, I answer one viewer’s question about some major cannabis stocks.
Joana recently emailed me at Feedback@MoneyandMarkets.com:
Hi, Matt. Nice to meet you. My name is Joana, and I’m a doctor from Brazil, and I really believe in CBD growth for the future of health care. That’s why I started investing in this kind of stock.
Following Money & Markets’ recommendations, I bought a few shares of Aurora, Canopy Growth, GrowGeneration and Scott’s Miracle-Gro, but they dropped a lot. Do you see a reason to sell them all, or are the companies strong and might evolve well? Thanks. — Joana.
Thank you for your question, Joana!
Let’s look at each stock and tell you the rating on my Money & Markets Cannabis Rating system.
Why You Invest in Cannabis Stocks
You can’t look at cannabis stocks the same way you would look at traditional equities such as Apple Inc. or General Motors. Cannabis is like cryptocurrency — it’s a different animal altogether.
Investors scrutinize cannabis stocks because it is still considered an illegal operation here in the United States.
However, it seems you are investing in these stocks because you believe in their products, not necessarily because you want to make some large capital gain from them.
That is something to consider: Why are you investing in cannabis stocks?
We all want to make money. But real joy comes from investing in a company or sector whose products you believe in.
4 Big Cannabis Stocks
Aurora Cannabis Stock Analysis
Let’s start with Aurora Cannabis Inc. (Nasdaq: ACB).
ACB’s 52-Week Performance
ACB hit a 52-week high of around $19 per share in February 2021. Since then, it has dropped almost 70%. It’s about $0.70 off its 50-day simple moving average.
However, cannabis stocks got a bit of a boost this week after Tilray Inc. (Nasdaq: TLRY) posted surprise positive earnings for its most recent quarter. That pushed companies like Aurora up a bit as well.
On the business side, Aurora and 22nd Century Group agreed to work with Cronos Group to license a biosynthesis intellectual property. Aurora also entered into a manufacturing agreement with Valens to create new cannabinoid products.
This suggests the company is undergoing a transformation. That will cost more money as it changes its business model. Aurora has already struggled to beat consensus earnings estimates in seven of the last eight quarters.
Aurora still earns an 83 on my Money & Markets Cannabis Rating system — which means ACB is still a strong stock compared to other cannabis operators.
Aurora is not a bad company. But you have to know the stock may not go anywhere for a bit.
Canopy Growth Corp. Analysis
Now there’s Canopy Growth Corp. (Nasdaq: CGC).
CGC’s 52-Week Performance
Similar to Aurora, Canopy had a big pop in its stock price in February 2021. However, it has fallen around 80% to its current price.
To me, the biggest thing here is the company’s partnership with beer-maker Constellation Brands Inc. (NYSE: STZ). In 2017, Constellation invested $4 billion into Canopy, but that investment has been a drain on Constellation’s earnings —around $0.31 per share in the most recent quarter. It means Constellation is losing money every quarter in part because of that investment in Canopy.
Canopy Growth scores an 18 on my cannabis rating system with poor momentum (12) and mid-range value (52).
Again, Canopy isn’t a bad company, but if Constellation sours on its investment, it may leave Canopy desperate for money. Keep in mind, CGC reported a $0.39 loss in earnings per share in November … even with Constellation’s investment.
GrowGeneration Corp. Analysis
GrowGeneration Corp.’s (Nasdaq: GRWG) fall from grace was more sudden.
GRWG’s 52-Week Performance
After hitting its 52-week high of around $65 per share in February 2021, GRWG fell, but not as much as Aurora or Canopy … suggesting investors weren’t as bearish on the company. (GrowGeneration isn’t a cannabis grower. It’s a hydroponics supplier.)
The company reported earnings per share of $0.07 in the last quarter — missing consensus estimates by $0.02. That sent GRWG into freefall. It has dropped around 83% from its February 2021 high.
On top of that, its return on equity was only 5.2%.
GrowGeneration rates a 25 on my cannabis rating system. Weak momentum (3) hurts GRWG, but it’s helped by better value (75) due to the lower share price.
Bottom line: GrowGeneration will need to see its flurry of acquisitions start to pay off before its stock price begins to recover from November’s slaughter.
Scotts Miracle-Gro Co. Analysis
Finally, we have Scotts Miracle-Gro Co. (NYSE: SMG).
SMG’s 52-Week Performance
Scotts is more diversified than a typical cannabis stock. Thus, its movements aren’t always in lockstep with cannabis growers like Aurora and Canopy.
SMG hit its 52-week high in April 2021. It rose in November, only to fall again to end the year.
It’s had a nice run of late. And it’s trading above its 50-day simple moving average.
Cannabis weighed on SMG, but so did supply chain issues.
However, Scotts does well in the spring as gardening returns. It shows nice momentum as the weather warms up, and that could carry SMG higher into the summer months.
SMG rates a 65 on my cannabis rating system with strong momentum (75) and low value (31).
Since SMG isn’t paired directly with the cannabis market, I expect Scotts to run back up even when cannabis stocks don’t.
The Takeaway
Here is a look at the one-year returns for all four stocks.
All four are in the red, but not as much as when you compare to the highs.
Overall, we have four good companies — three of which are struggling due to a lag in sales and overall sentiment in the cannabis market.
The reason to sell them would be to cut any losses you have incurred since you bought them. You could preserve capital and reinvest in them if you see some positive, sustained momentum.
However, if you are in these companies because you truly believe in their mission and products, holding them isn’t a bad option, so long as you can stomach the losses.
It all comes down to why you invested in these cannabis stocks in the first place.
If it’s only because you want gains, then selling at least part of your position isn’t a bad idea. You can reinvest in other cannabis companies or even ETFs and REITs if you choose.
I believe strongly in the cannabis market. But traditional investors are waiting for better earnings numbers. That doesn’t bode well for cannabis stocks in the near-term.
I hope that helps in your decision-making process, Joana. I appreciate you asking. For sending it, we will hook you up with some Money & Markets gear as our way of saying “thanks.”
You, too, can get Money & Markets swag by submitting a question for me, chief investment strategist Adam O’Dell or Green Zone Fortunes co-editor Charles Sizemore that we use in any of our videos. Just send us your questions and feedback.
Where to Find Us
Coming up this week, we’ll have more on The Bull & The Bear podcast, so stay tuned.
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We have a lot of great weekly video features on our channel, including:
- Ask Adam Anything — Where I get to sit down with Chief Investment Strategist Adam O’Dell and ask him any question (from you or me) and get his insights into the stock market.
- Investing With Charles — Green Zone Fortunes co-editor Charles Sizemore and I talk about all things related to stocks and the economy, including comparing stocks to give you the best investment advice.
- The Bull & The Bear — Our weekly podcast where I show you the trends and analysis that moves the market.
All of these series are on our YouTube channel.
Safe trading,
Matt Clark, CMSA®
Research Analyst, Money & Markets
Matt Clark is the research analyst for Money & Markets. He is a certified Capital Markets & Securities Analyst with the Corporate Finance Institute and a contributor to Seeking Alpha. Prior to joining Money & Markets, he was a journalist and editor for 25 years, covering college sports, business and politics.
