- Cannabis companies’ earnings are coming in for the third quarter of 2019.
- Anthony just updated the Green Flag Index, our metric to spot the best (and worst) marijuana companies in the sector.
- He discusses the index’s cheapest and most expensive companies — and what you need to keep in mind if you’re considering buying in.
The cannabis sector is back into earnings season.
With only two major cannabis companies reporting so far, results are mixed between great and awful.
Based on these earnings reports, I updated Banyan Hill’s Green Flag Index. It’s our metric for ranking cannabis companies to help spot the best and worst names.
The sector is sitting near all-time lows. September was a brutal month.
The vaping crisis grew from a fringe fear to a national issue. The Centers for Disease Control and Prevention (CDC) is now tracking hundreds who have fallen ill and more than 26 deaths.
In response, three states have put temporary bans on at least some vaping products.
The news caused American and Canadian cannabis stocks to sell off together. This alone highlighted the irrationality in the market.
Let’s review what this means for us as investors.
Vaping Crisis Linked to U.S. Black Market
Based on my research, the vaping crisis is largely isolated to the U.S.
That’s because America’s prohibition of cannabis supports a vibrant black market. And the CDC has linked the vast majority of cases directly to black-market products.
The only way to reduce the use of black-market vaping pens — and other products — is to allow for legal and regulated alternatives.
Canadian officials understand this. Canada’s market is opening up to vape products as we speak — there isn’t any word of banning those products.
Cannabis Earnings Release: Hexo Corp. and Aphria Inc.
The vaping crisis has a strong effect on marijuana stocks. Think of it as providing a “discount” on U.S. and Canadian producers.
I have the latest earnings reports from two major cannabis producers. These reports are a great way to find the ones with best value:
- Hexo Corp. kicked off the third quarter earnings season with a bust. Revenue fell 3%. And its earnings loss grew 75% to $5.8 million. But the decision to scrap its 2020 forecast of CA$400 million in sales dealt a blow to the entire sector. Hexo decided to blame its declining growth on Canada’s slow rollout of dispensaries. On September 10, Aurora Cannabis Inc. took the same route — casting shade on the sector as a whole instead of owning up to internal failings.
- Aphria Inc. bucked the trend by boosting marijuana sales. Revenue from cannabis was 5.7% higher. It also maintained positive earnings. This points to a sound strategy by management.
Despite Canada’s slow permits for new dispensaries, sales are still growing.
Government data shows that sales of legal marijuana products have grown month over month since last October. That’s when Canada legalized recreational pot.
With this in mind, let’s take a look at the updated Green Flag Index to see how the top producers stack up.
And you can watch my video below to learn about why Hexo’s and Aphria’s earnings reports are so important for the sector — and what these reports mean for you if you’re investing in cannabis stocks.
The Green Flag Index: Best and Worst Producers
I collaborated with a group of Banyan Hill analysts to design this index.
It measures what we’d pay for a company based on how much product it sells — kilograms produced and average price per gram.
We blended each company’s current and future production to create the index. The higher the rating in the index, the more we pay for a producer.
As you can see, Aurora and Aphria have the lowest ranking. That means they are “cheap.”
But it’s important to keep in mind that Aurora’s growth has stalled out while Aphria is proving itself to be a strong performer.
Organigram, Canopy and Hexo sit in the middle of the pack.
All three hold promise for the release of Cannabis 2.0 this fall. That’s when regulators will allow the sale of vapes, edibles and infused drinks in Canada.
This trio is experiencing stagnant growth with no sign of profitability yet.
And Tilray and Cronos continue to command the highest premiums. That’s because of their partnerships.
See, Tilray partnered with beer titan Anheuser-Busch InBev. The two are planning on releasing a cannabidiol-infused drink to Canadians by 2020.
I don’t expect this to automatically be a hot seller, but it’s an important step to access the American market.
Meanwhile, Cronos’ partner, Altria Group Inc., is struggling due to the vaping crisis. The company bought Juul, a popular vaping company, last December.
The major purchase put the companies, and their plans to push vaping products, in the spotlight with politicians and regulators.
We are one year into Canada’s legalization, and earnings are pointing to real differences between top producers.
It’s important to use discretion on which companies you add to your portfolio — I can help you there.
Stay Up to Date on Pot Stocks and News
I do a weekly update on the cannabis market on YouTube. In my videos, you’ll find the latest news on what’s going on in this industry. Make sure you subscribe — if you haven’t already — and you’ll receive a notification when I post new content.
And for a better guide on what pot stocks to buy, join my colleague Matt Badiali and me in Real Wealth Strategist.
In this newsletter, we keep a close eye on the ups and downs of the cannabis industry — and we update our portfolio according to the moves we see in the stock market.
In the meantime, I’d like to hear from you. What cannabis companies are you following? Or are you just sticking to FAANG stocks?
Leave a comment below and let me know if there are any companies you’d like me to cover.
Internal Analyst, Banyan Hill Publishing
P.S. Every day, we get closer to legalizing marijuana in the U.S. In Matt Real Wealth Strategist newsletter, he and I focus on finding the most promising cannabis stocks. Our readers already locked in gains of 14%, 149%, 64% and more on pot stocks. Once legalization occurs, the sky’s the limit! Click here to learn more.