In this week’s Marijuana Market Update, I update you on recent legalization measures through the MORE Act. I also share the top five cannabis value stocks according to my Cannabis Power Ratings system.
MORE Act Buoys Cannabis Stocks
We’ve been here before.
In November 2021, we saw a flurry of action in Washington, D.C. related to cannabis legalization:
- Republican Nancy Mace filed a bill to legalize and tax cannabis federally.
- Democrat Brian Schatz and independent Bernie Sanders filed an amendment to the National Defense Authorization Act federally legalizing medical marijuana for military veterans.
- Senate Democratic leadership said it was “long past time to end the federal prohibition on marijuana.”
The two things those actions had in common:
- They pushed the broader cannabis market to strong showings in the first weeks of November.
- They went nowhere in terms of ending federal prohibition.
Last week, by a roll call vote of 220-204 (mostly down party lines), the U.S. House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement (MORE) Act.
On Monday, the House officially sent the bill to the Senate Finance Committee.
For the second time, the MORE Act cleared the House and now faces an uncertain future in the Senate.
As things stand, I project this bill will languish in committee and may not even see a vote on the Senate floor.
Same song, second verse.
But cannabis stocks responded nicely to the news of the MORE Act passing out of the House.
Despite MORE Act, Trading Headlines Is Foolish
In the last 12 months, cannabis stocks have dropped about 47%, according to the Money & Markets Cannabis Index. But after reaching a 52-week low on March 14, stocks have rallied slightly — moving up 8.8%.
On Monday, following the passage of the MORE Act in the House, large multi-state operators saw their stock prices jump:
- The Scotts Miracle-Gro Co. (NYSE: SMG) — up 1.26%.
- Canopy Growth Corp. (Nasdaq: CGC) — up 5.43%.
- Aurora Cannabis Inc. (Nasdaq: ACB) — up 4.81%.
- General Cannabis Corp. (OTC: CANN) — up 3.26%.
Cannabis stocks had a nice run when Congress announced it was looking at the MORE Act and maintained that run on the bill’s House passage.
But you must exercise some caution because the cannabis market loves to trade on headlines … which is never a promising idea.
The MORE Act getting out of committee, let alone passing the Senate, is an extremely slim prospect.
If that reality sets in with investors, we could see stock prices knock back down again.
I am optimistic, but Congress has failed the market many times before.
Cannabis Power Ratings Metrics
Several viewers have asked me to discuss cannabis stocks with good “value.”
In my Cannabis Power Ratings system, value is one of two metrics I use to determine the overall stock score. Momentum is the other.
I avoid the four other metrics we use for our proprietary Stock Power Ratings system that my cannabis system is based on. Here’s why:
- Volatility — Like cryptocurrency, the cannabis market is extremely volatile.
- Size — The gap between large cannabis companies and small ones is wide, especially when dealing with the small universe of stocks on the market.
- Growth — Cannabis companies experience sales growth, but their earnings-per-share growth can be another story.
- Quality — Returns on assets, equity and investment for cannabis companies are notoriously low — most are in negative territory.
So that leaves us with momentum and value.
Momentum is the staple metric we use because we follow the principle of buying high and selling higher. So it only makes sense to have stock price momentum as a factor we use to analyze cannabis stocks.
Then, there is value.
Examining price-to ratios (price-to-sales (P/S), earnings (P/E), cash flow and book (P/B) value) makes sense because we can get an accurate picture of the kind of value a cannabis stock has. The higher the price-to metrics compared to its peers, the more likely we will stay away from a stock.
Top 5 Cannabis Value Stocks
You asked for it, so here are the top five value cannabis stocks, according to my Cannabis Power Ratings system:
Some of these may look familiar, as I shared my top five overall cannabis stocks in last week’s update.
Fire & Flower Holdings Corp. (OTC: FFLWF), SOL Global Investments Corp. (OTC: SOLCF) and TILT Holdings Inc. (OTC: TLLTF) were all on that list.
Mentor Capital Inc. (OTC: MNTR) is a private equity firm specializing in emerging growth investments. It focuses on cannabis companies, but it only invests in companies with earnings.
MNTR trades with a P/S ratio of 0.21 compared to the peer average of 4.87 and a P/B value ratio of 0.56 compared to its peer average of 4.62 — showing it is extremely undervalued.
Then, you have Emerald Health Therapeutics Inc. (OTC: EMHTF), which is a Canadian cannabis company specializing in medical cannabis.
The stock trades at a P/S ratio of 1.23 and a P/B ratio of 0.27. Like MNTR, those ratios show an undervalued weight on EMHTF.
TILT Holdings Analysis
But the stock that stands out the most to me is TILT Holdings Inc. The Arizona-based company sells various cannabis products and services in the U.S., Canada, Israel, Mexico, South America and the European Union.
The company also focuses on greenhouse cannabis cultivation, CO2 extraction and shipping software for smaller operations.
TILT Holdings Closes in on Golden Cross
The stock has had a volatile 12 months — dipping as low as $0.11 per share to a high of $0.68 per share.
For the year, TLLTF is up 44%, and its current price remains slightly above its 50-day moving average. That 50-day average is very close to crossing over the 100-day moving average, setting up a potential golden cross scenario where a price breakout could follow.
On the value side, TLLTF trades with a P/S ratio of 0.51 and a P/B ratio of 0.45, making it a solid, value-based cannabis stock.
I see a lot of strength in this stock, but I want to see it trend a little more upward before I would start investing. Right now, I see some sideways price action, but a more defined uptrend could make this stock a solid buy.
One more thing: 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.
Where to Find Us
Coming up this week, we’ll have more on The Bull & The Bear podcast, so stay tuned.
Make sure you subscribe to our YouTube channel and get notified each and every time we post a new video.
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 move the market.
All of these series are on our YouTube channel.
Also, you can follow me on Twitter (@InvestWithMattC), where I’ll give you even more insights, not just in the cannabis market.
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.
