It’s easy to see why growth investors like marijuana stocks. They have been on fire. Aurora Cannabis (NYSE:ACB) stock is up 45% so far this year, and Canopy Growth (NYSE:CGC) has scored a 60% gain. The Horizons Marijuana Life Sciences ETF, which tracks the industry, is up 32% in 2019.
All this has happened without any real news. But news is coming.
Aurora and Canopy are both due to report results this week. Analysts will be looking at their sales growth and how much cash they have in the bank. For ACB stock, which recently did a C$345 million convertible offering, and Canopy, which got a $3.8 billion equity infusion from Constellation Brands (NYSE:STZ) last year, those numbers should look good.
But we’re not yet at the point of evaluating pot companies by any real metrics. It’s all a lot of smoke, mirrors, highs and lows.
The ACB Stock Outlook
Take Aurora. While ACB stock is up sharply in 2019, its all-time high was achieved last October, at $12.52 per share, nearly 60% above where it opened for trade this morning.
Only three analysts cover Aurora and they’re expecting a net loss of 5 cents Canadian per share, on revenue of C$54.6 million. More important are their estimates for all of 2019, C$338 million in sales, and 2020, where they expect revenue of C$839 million.
Aurora has been buying up smaller rivals with stock, and our Luke Lango estimates their potential production could triple next year, with good distribution in key Canadian provinces.
The trouble is that, at its Monday open near $7.50 per share, you’re paying almost $7.5 billion, or $50,000 per kilogram of 2019 production. If they reach their 2020 production target, which ranges up to 700,000 kilograms, you’re still paying $10,700 per 2020 kilogram for the stock right now.
Aurora is thus highly vulnerable to swings in investor attitudes. Pot sales have been legal in Canada only since October, and supply chain difficulties have emerged. Aurora’s ability to deliver is being questioned. Crackdowns on cannabis byproducts, or troubles at other companies, could also hammer it.
The Constellation Brands investment gives Canopy Growth a cash net under near-term problems.
CGC stock is expected to lose 17 cents per share this quarter, but nine of 10 analysts following the stock like it.
Canopy has 4.3 million square feet of production space, and Constellation’s investment should put it in good position to benefit from moves by nine states, including Constellation’s home base of New York, toward legalization.
Still, Canopy’s market cap of nearly $15 billion is formidable. A lot of that money is speculation capital, which could disappear quickly based on adverse news headlines.
Groups that have the ear of the current administration are pushing against legalization, claiming it has been a disaster in Colorado, and the move is mainly being pushed by Democratic politicians like Sen. Cory Booker of New Jersey.
Global legalization is not a slam dunk.
The Bottom Line on Cannabis Stocks
By any conventional measure, both Canopy and Aurora are overbought. This is a risk-on investment, as the shares have fallen hard twice just since the start of 2018.
If you’re going to play, know that you’re going to have to keep a close eye on the news, selling when prices are strong (as they are now), buying only when the stocks are weakest.
I wouldn’t put a dime in either Aurora or Canopy right now but if they fall hard after earnings, I might consider putting some “mad money” — money I can afford to burn — into one of them.
Sadly, I don’t have money to burn.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
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