Three Cannabis Stocks With Strong Momentum
This week, we use AAII’s A+ Investor Stock Grades to give you insights into three cannabis stocks benefiting from the wider acceptance and legalization of marijuana. For investors focused on companies that either support or are engaged in the research, development, distribution and sale of medical and recreational marijuana, cannabis stocks Amyris Inc., GrowGeneration Corp. and Tilray Inc. may help grow your portfolio.
Momentum in the Legalized Marijuana Industry
The marijuana industry is composed of firms that either support or are involved in the legal research, development, cultivation, production, distribution, marketing and sale of medical and recreational marijuana. It’s a unique mix of different firms and business models focused on the marijuana industry such as suppliers, retailers, real estate and technology, as just a few examples. The legal sales of marijuana in 2020 hit a record of $17.5 billion, a 46% increase from 2019.
Cannabis has been gaining wider acceptance and has been legalized in an increasing number of nations and states for medicinal, recreational and other uses. Currently, in the U.S., 16 states including the District of Columbia have fully legalized adult marijuana use and 35 states have approved it for medicinal use.
Recreational marijuana got the greenlight from lawmakers over the past six months in five new states: Arizona, Montana, New Jersey, South Dakota and Virginia. Meanwhile, four additional states are now considering legalization: Connecticut, Maryland, New Mexico and North Dakota. One of the biggest drivers of this policy shift is the revenue that states would receive from marijuana taxes.
Pure-play marijuana stocks mostly are not exchange-listed and remain highly risky due to varying state laws and the prevailing U.S. federal laws. Marijuana is still illegal on a federal basis. Many large marijuana companies have continued to post considerable net losses as they focus on investing in resources and equipment to accelerate revenue growth. The industry is maturing and growing, but it remains volatile and there are likely to be periods when prices become detached from fundamentals.
Grading Cannabis Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three cannabis stocks — Amyris, GrowGeneration and Tilray — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Cannabis Stocks
What the A+ Stock Grades Reveal
Amyris (AMRS) is an industrial biotechnology company. The company is primarily focused on applying its technology platform to engineer, manufacture and sell high performance, natural and sustainably sourced products into the health & wellness, clean beauty and flavor and fragrance markets.
Amyris has been working to create synthetic cannabinoids (chemical compounds in the cannabis plant) that could disrupt the industry and make it less reliant on large, expensive growing facilities. Its technology platform enables users to rapidly engineer microbes and use them as catalysts to metabolize renewable, plant-sourced sugars into volume, high-value ingredients.
Its biotechnology platform and industrial fermentation process replace existing complex and expensive manufacturing processes. The company’s platform is used to design, build, optimize and upscale strains producing eight distinct molecules at commercial volumes, to more than 15 commercial ingredients.
Amyris has a Value Grade of F, based on its score of 98, which is considered ultra-expensive. The company’s Value Score ranking is very high across several traditional valuation metrics, with a score of 84 for the price-to-sales ratio, 99 for the enterprise-value-to-EBITDA (EV/EBITDA) ratio and 89 for shareholder yield (remember, the lower the score the better for value). Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-earnings ratio, price-to-book-value ratio and price-to-free-cash-flow ratio.
Amyris has a Momentum Grade of A, based on its Momentum Score of 96. This means it ranks in the top tier of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters.
Estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. Amyris’ Estimate Revisions Grade is F, which is considered very negative. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Amyris has posted negative earnings surprises for its last two fiscal quarters, mainly due to higher marketing investments in consumer brands and new research and development (R&D) programs. In addition, over the last month, the consensus earnings estimate for the fiscal year ending December 31, 2021, has decreased significantly from negative $0.12 per share to negative $1.38 per share; there have been three downward revisions to the fiscal-2021 estimate and zero upward revisions.
GrowGeneration (GRWG) is a farm supply company. The company owns and operates retail hydroponic and organic specialty gardening retail outlets. It is engaged in the selling of products, such as organic nutrients and soils, advanced lighting technology, hydroponic and aquaponic equipment and other products needed to grow indoors and outdoors. The company’s products include harvesting, soils and mediums, containers and trays, pest and disease control, nutrients and additives, hydroponics, grow lights, fans and ventilation and cloning and propagation. It also operates an online superstore for cultivators.
Hydroponics is one of the top cultivation methods for the legal cannabis industry, and GrowGeneration is one of the leading suppliers of hydroponic equipment in the U.S.
Its subsidiary, GrowGeneration Hemp Corp., is engaged in developing and selling hemp agricultural products. It owns and operates a chain of approximately 55 retail hydroponic/gardening stores. The company serves a community of commercial and urban cultivators growing specialty crops including organics, greens and plant-based medicines. The company expects to expand to 60 garden centers in 2021 across 15 states.
GrowGeneration has an average A+ Growth Grade of A. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow.
The company has exhibited strong sales growth over the past year. Sales increased 172.7% year over year for the quarter ending March 31, 2021, to $250 million, while adjusted earnings per share grew over 280%. The company expects to generate sales between $415 million and $430 million in 2021. GrowGeneration is scheduled to provide a business update presentation at the Stifel 2021 Virtual Cross Sector Insight Conference on Thursday, June 10.
The company has a Momentum Grade of A, based on its Momentum Score of 83.
Tilray (TLRY) is engaged in the pharmaceutical sector. The company is a supplier of cannabis products to pharmaceutical distributors. The company is focused on medical cannabis research and the cultivation, processing and distribution of cannabis products worldwide. Through its subsidiary, FHF Holdings Ltd. (Manitoba Harvest) it manufactures, markets and distributes hemp-based consumer products. The portfolio of Manitoba Harvest includes hemp hearts, hemp oil, Hemp Yeah! granola, Hemp Yeah! protein powder and Hemp Bliss milk.
Tilray also supplies cannabis products to patients in a number of countries spanning five continents through its subsidiaries in Australia, Canada and Germany, and it produces medical cannabis in Canada and Europe.
On May 3, Tilray announced that it had completed its merger with Aphria Inc. The two companies, both of which operate in the cannabis-focused consumer packaged goods space, will operate as Tilray. The Tilray-Aphria merger has brought together Aphria’s leadership in the Canadian recreational cannabis market with Tilray’s strength overseas.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
Tilray has a Quality Grade of D, putting it near the bottom tier among all U.S.-listed stocks. The company ranks poorly in terms of its return on assets and gross income to assets, ranking respectively in the 14th and 10th percentile of all U.S.-listed stocks. However, it ranks highly in terms of its change in total liabilities to assets, in the 85th percentile.
Tilray has a Momentum Grade of A, based on its Momentum Score of 92 and an average Growth Grade of C.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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