In this week’s Marijuana Market Update, I discuss cannabis value stocks.
A viewer of mine, Thomas, emailed me at Feedback@MoneyandMarkets.com and asked:
I know part of your Cannabis Power Ratings system focuses on value, but there aren’t many cannabis stocks you can consider value.
Can you tell me if there are any strong cannabis value stocks?
Thanks for your email, Thomas.
First we’ll take a wider view of our Money & Markets Cannabis Index.
Then we’ll zoom in to August for a closer look at cannabis value stocks and find an answer for Thomas.
Let’s get started.
Money & Markets Cannabis Index
Let’s look at the Money & Markets Cannabis Index:
Over the last 12 months, cannabis stocks have faltered, and the index is down a little more than 28%.
We saw a spike in cannabis stocks in January 2022 after chatter increased over potential cannabis legalization on the federal level.
Talk of the SAFE Banking Act passing (which would grant cannabis companies access to traditional banking services they don’t have access to now) added to the spike.
However, that talk subsided right as inflation and recession fears took hold and investors started to push the market down again.
Cannabis stocks fell further from where they are today until a run-up again last month.
Cannabis Stocks in August
Zooming in to August:
We can see a nice climb higher in the middle of the month — about 6.5% — before the broader market sell-off pushed the cannabis index lower.
For the month, the cannabis index fell around 2%.
The midmonth downturn was more likely due to investor sentiment in the broader market rather than just in cannabis.
Now, on to Thomas’ question…
To Spot Cannabis Value Stocks, Look at Price-to-Earnings Ratio
I looked at the holdings in our Money & Markets Cannabis Index to see if any cannabis stocks had a positive price-to-earnings (P/E) ratio.
The P/E ratio is the stock price divided by the company’s earnings per share for a designated time frame.
It tells investors how much they will pay for $1 of earnings.
Note: The lower the P/E ratio, the better the value of the overall stock.
However, the problem is that a majority of cannabis stocks aren’t making any money. Therefore, they have negative P/E ratios.
That isn’t good.
After some research, I did find a few with positive P/E ratios:
The Hunt for Value in the Cannabis Market
For reference, the average P/E ratio for the cannabis production industry is 10.98.
Anything lower than that is a great ratio for cannabis companies.
One snag is for companies like Power REIT (NYSE: PW), NewLake Capital Partners Inc. (OTC: NLCP) and Innovative Industrial Properties Inc. (NYSE: IIPR).
These are categorized as real estate investment trusts (REITs), not cannabis producers.
Both PW and IIPR have ratios below the average P/E ratio for REITs, which is good.
NLCP’s P/E ratio is lower but right on the cusp of the industry average.
In terms of traditional cannabis companies, Jushi Holdings Inc. (OTC: JUSHF) comes in with the best P/E ratio relative to the broader cannabis industry.
TerrAscend Corp. (OTC: TRSSF) comes in second with its P/E ratio.
Verano Holdings Corp. (OTC: VRNOF) and Green Thumb Industries Inc. (OTC: GTBIF) are both well above the cannabis industry average on P/E ratio.
Top Value Performers of August: TRSSF vs. JUSHF
Though value doesn’t always correspond to strong stock performance, we can isolate TerrAscend and Jushi to compare their stock performance.
In August, TerrAscend saw a few brief ticks upward but suffered a rapid fall in the middle of the month.
Jushi, on the other hand, ticked up at the beginning of the month with a noticeably smaller midmonth fall than TerrAscend.
For the month, Jushi didn’t lose much.
But valuation alone cannot dictate whether a stock is a solid investment.
We have to look at other things, like momentum, as we do in our Cannabis Power Ratings system.
Bottom line: You have to look at the whole picture — value and momentum.
We can see that Jushi is a solid cannabis value stock and is undervalued compared to its cannabis-producing peers.
And it does have better momentum than a company like TerrAscend.
This tells me that Jushi would be the better long-term investment as it has great value and stronger momentum than its peers.
I hope that helps you out, Thomas.
That’s all for me this week.
One more thing: Any questions? You can get Money & Markets swag by submitting a question for me, Adam O’Dell or Charles Sizemore that we’ll use in any of our videos. Just send us your questions and feedback.
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Also, you can follow me on Twitter (@InvestWithMattC), where I’ll give you even more insights, not just on the cannabis market. You can also check out my new Stock Power Daily series on the Money & Markets website. I give you a new stock every day that I expect to outperform the market based on our proprietary Stock Power Ratings system.
Matt Clark, CMSA®
Research Analyst, Money & Markets
Matt Clark is the research analyst for Money & Markets. He’s the host of our podcast, The Stock Power Podcast, as well as the Marijuana Market Update. He’s also a certified Capital Markets and Securities Analyst through the Corporate Finance Institute. Before joining the team, he spent 25 years as an investigative journalist and editor — covering everything from politics to business.