How Does Canopy Growth Corp. Rank Among Its Peers?

Matthew Carr By Matthew Carr
Chief Trends Strategist

Beyond the Bong
This is individual research and does not constitute investment advice.

I love earnings season.

That’s when you’re proven right or wrong about a company.

Shares are also at their most volatile, so it’s a great time to go bargain hunting or to book some big gains.

Right now it’s bargain hunting time in cannabis. The sector was rocked last week by freak-outs over earnings…

Cronos Group (Nasdaq: CRON) shares tumbled nearly 10% after the Canadian licensed producer reported full-year net income went from a profit of CA$2.49 million in 2017 to a loss of CA $19.2 million in 2018.

But that wasn’t the only earnings jolt we got.

We also heard from CannTrust Holdings (NYSE: CTST). Here, the panic was even more pronounced. Shares tumbled 19.2% as the company went from a profit of CA$6.25 million in the fourth quarter of 2017 to a loss of CA $25.5 million in the final quarter of 2018.

But as I’ve said, this is the same pattern we’ve seen and are going to see in the early days of Canada’s legalization. Leading up to legalization, companies had to ramp up production to prepare as much product as possible and to try to stave off a shortage.

Revenue is going to skyrocket. But until then losses are going to widen exponentially.

That’s because the lowest-margin product – dried flower – historically accounts for the highest proportion of sales in new legal markets. This is a trend we’ve seen time and time again in all legal markets.

Unfortunately, the market is freaking out over another seasonal issue… even though it’s good for cannabis companies.

Health Canada reported January sales of dried flower fell 3.7% from December to January…

Gasp!

But to me, this is noise that we can use to our advantage.

That’s because there are two pieces of information to take note of…

I’ve covered the cyclical nature of “weed smoking season” here in the U.S., particularly in Colorado and Oregon. This is when adult-use cannabis sales fall during the winter months, bottom out in February and then spike in March.

Even though the legal data we have is from only the last couple years, the trend is still quite apparent.

Second, Health Canada reported the sale of cannabis oils gained 4.3% from December to January. This is exactly what we want to see.

So while the markets are focusing on dried flower sales falling – and are worrying that dried flower sales for February will come in even worse (which we know would be keeping on trend) – they’re missing the bigger picture.

And that’s the type of information inefficiency we can use to our advantage.

On the U.S. front, Charlotte’s Web Holdings (OTC: CWBHF) reported revenue jumped 71% to $21.5 million with 57% of that from its e-commerce channels. The market reaction was far more subdued than it was for the Canadian counterparts.

Making the Grade

With the recent earnings-induced volatility, my team and I decided to look at the health of cannabis shares.

Today, we’re looking at which companies are trading above and below their 50-day moving averages.

The 50-day moving average is one of the most commonly used tools in trading. If shares are above this 50-day moving average, the trend is bullish. If they’re below, the trend can be bearish.

So here are the top 10 companies trading below their 50-day moving averages…

NewBridge Global Ventures (Nasdaq: NBGV) leads the pack. But the CBD infused beverage company reported strong fourth quarter results last week. We also see Wayland Group (CSE: WAYL), CannaGrow Holdings (OTC: CGRW) and General Cannabis (OTC: CANN) on the list.

Now here are the top 10 trading above their 50-day levels…

AgraFlora Organics International (CSE: AGRA), Organic Flower Investments Group (CSE: SOW) and India Globalization Capital (NYSE: IGC) are at the top. And even though 48North Cannabis (TSXV: NRTH) rounds out the top 10 at 50% above its 50-day moving average, a lot of cannabis shares are trading close to this level.

The High Five

1) Aphria (NYSE: APHA) won’t report third quarter earnings until April 15. But the company has just launched its first CBD cosmetics line in Germany, CannRelief. This is being distributed by Aphria’s German subsidiary, CC Pharma, which has access to more than 13,000 pharmacies.

2) iAnthus Capital Holdings (OTC: ITHUF) acquired CBD for Life for $13.7 million. Projections vary for how big the U.S. CBD market could be. But we now have CVS Health (NYSE: CVS) and Walgreens Boots Alliance (Nasdaq: WBA) selling the products. And iAnthus believes retail sales could be $16 billion by 2025.

The CBD for Life acquisition gives iAnthus a product sold in 750 retail locations, with 25 locations being added every week.

3) Choom Holdings (OTC: CHOOF) announced a letter of intent to purchase a 95% stake in a Florida cannabis applicant. The Florida medical marijuana program has 190,000 qualified applicants, making it one of the largest medical markets in the U.S. And Florida just ended a ban on smoking medical marijuana.

And it also signed a memorandum of understanding for exclusive distribution rights to the Better Choice Company’s CBD Bona Vida products for pets.

4) WeedMD (OTC: WDDMF) was one of the few cannabis winners last week. The company announced a CA$39 million credit facility with the Bank of Montreal to purchase a 98-acre Health Canada-licensed property. This includes a 610,000-square-foot state-of-the-art greenhouse.

5) Canopy Growth Corp. (NYSE: CGC) continues to build its stable of celebrity partnerships. The Canadian cannabis powerhouse signed a partnership with Houseplant. This is a cannabis brand founded by actor Seth Rogen and screenwriter Evan Goldberg.

This is the second big-name deal signed in the past month for Canopy. The other was with Martha Stewart. And in the branding war about to get underway, Canopy has a real advantage.

Over the past month, the Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF) has struggled, losing 3.75%…

But as we can see, shares of Choom have been on a tear, up more than 34%. And shares of iAnthus have outpaced the marijuana ETF as well.

WeedMD has lagged, with Aphria and Canopy the worst of the five over the past month.

It’s going to be a volatile stretch for the Canadian producers this earnings season. The costs to ramp up production are going to weigh on these companies, as will demand for the higher volume of lower-margin products. And the market doesn’t understand that’s the whole nature of the business.

That’s 100% fine. This is something we can take advantage of.

We know the trends. We know March reports will show that it was a record-selling month for cannabis in Colorado and other states. Then there’s 4/20 this month and the rest of weed smoking season.

Cannabis has already had a great start to 2019. And we want to buy the dips.

If you have a pot stock in mind that you’d like me to discuss here, leave the ticker symbol in the comments section.

Here’s to high returns,

Matthew

P.S. Earnings weren’t the only headline grabber last week. The Secure and Fair Enforcement (SAFE) Banking Act cleared the House Financial Services Committee markup last week. This is the first marijuana banking bill to get this far. It’ll likely be guided to the House floor for a vote soon. And it’s expected to pass. But it will have a more difficult time in the Senate.

At the very least, this is a positive step forward.

And another big step forward came as Walgreens announced it would begin selling CBD products in nine states. The pharmacy chain is joining CVS Health in legitimizing the business.

I’ll be watching these stories closely in the weeks ahead.