Aphria Inc (fka APHA)

[FUNMAN]

Aphria is the clear winner here: Marijuana Stocks Are Setting Up After Long Declines; Should You Buy Them?

https://www.investors.com/news/marijuana-stocks-good-buy/?src=A00220&yptr=yahoo

BILL PETERS
11:18 AM ET 08/28/2020

Throughout this article there are clear positive statements about Aphria, making it the clear LP winner to invest in. It's also why I believe if the Q3 revs top $180M, the new PPS floor will be $6. - FUNMAN

After falling for nearly two years, some marijuana stocks on major U.S. exchanges are forming consolidation or base patterns. But are any marijuana stocks on major U.S. exchanges a good buy now?

Even before the coronavirus pandemic, analysts were predicting a tough stretch ahead for the industry, as cash and financing dried up. Layoffs, executive departures and steep write-downs were common among the top players. Big producers, like Canopy Growth (CGC) and Aurora Cannabis (ACB), have scaled back operations. With the pandemic still creeping through North America, money in the bank will become more crucial.

Some analysts and executives argue that the cannabis industry, and stocks related to it, still have long-term potential for growth. But the pandemic has laid waste to financial forecasts. New executives — focused more on balance sheets than startup swagger — aren't done cutting costs.

For now, though, marijuana stocks like Canopy and Aphria (APHA) have settled into tighter trading patterns. Innovative Industrial Properties (IIPR) even managed to stage a breakout. Here's a look at how the biggest marijuana stocks stack up, by IBD metrics.

Marijuana Stocks And The Lockdown
As governments urged people to stay inside in March, there were reports of a surge in cannabis demand in legal U.S. states and Canada, whose legal era began in October 2018. Medical marijuana customers stocked up on prescriptions, while recreational customers loaded up on product to make the lockdown a little more mellow or a little less boring.

As the pandemic descended on the U.S. in March and April, states, to some degree, allowed cannabis stores to remain open during the pandemic. Most of Canada's provinces did the same.

But Ontario, Canada's biggest province by population and considered a key driver of sales growth for the nation's industry, initially ordered pot shops to close. It later allowed temporary delivery and curbside pickup. In May, the province allowed in-store service to reopen, provided cannabis shops could meet safety requirements.

Canada Weed Sales
In June, sales at Canada's pot shops increased 7.8% to $201 million Canadian dollars, according to government data released in August.

"The performance was driven by stores reopening, second wave products building, and new store additions particularly in Ontario with the largest province accounting for 50% of the sequential sales growth in June," Stifel analyst Andrew Carter said in a research note.

"The Canadian market is clearly at an inflection point," he added, "but we continue to outline a negative approach overall for the Canadian producers with lofty valuations prevailing against uneven execution in a fragmented, increasingly competitive category."

Ontario has continued to license more stores, after industry executives complained the region had been slow to do so, hindering customer access.

Coronavirus Impact On Marijuana Stocks
However, Carter has said Canada's big pot producers face increasing price competition, as rivals roll out cheap weed brands in an effort to compete with the illicit market.

As the coronavirus pandemic leaves the economy in flux, investors and analysts have focused more on which companies have enough cash to ride out the stoppages.

Analysts have pointed to Canopy Growth and Cronos Group as having healthy cash positions, thanks to big investments from Constellation Brands (STZ) and Altria (MO), respectively. Bank of America analysts in March called Aphria a solid defensive play, citing its cash cushion.

Marijuana Stocks Fundamentals
Earnings growth, or at least the prospect of strong earnings, is a hallmark of top stocks. But the marijuana industry, broadly, is losing money. The industry's billion-dollar valuations, in some cases, dwarf million-dollar quarterly sales figures. Not surprisingly, marijuana stocks have poor Earnings Per Share Ratings.

Innovative Industrial Properties, however, leads with a 79 EPS Rating out of a best-possible 99. And in July, it became the rare pot stock to make the IBD 50 Stocks To Watch list.

Tilray stock has an EPS Rating of 1, the worst possible.

Marijuana Stocks Technicals

Throughout much of 2019 and 2020, marijuana stocks have fallen on disappointing financials. The Composite Ratings for pure-play marijuana stocks listed on the major U.S. exchanges, as of August, still weren't great. The best rating for a pure-play pot producer went to Aphria stock, which stood at 50 out of a best-possible 99. Innovative Industrial Properties has a 94 Composite Rating, the best overall.

IBD research says investors should focus on stocks with Composite Ratings higher than 90. The Composite Rating is a broad measure of a stock's performance, including earnings and various technical factors.

The relative strength lines of most marijuana stocks, which measure their performance against the broader S&P 500, have largely eased lower.

Marijuana Stocks' Chart Patterns
When a stock dips or flattens out into a base after a charge higher, that can indicate that investors are taking a breather, shaking out bearish traders before more sustained support comes in.

Investors should also look for stocks with strong fundamentals that are breaking out of proper bases, IBD's research shows.

Cronos Stock Chart

Cronos Group in August reported a steeper-than-expected second-quarter loss. Lower pot prices in Canada and coronavirus-related store closures in the U.S. triggered millions in impairments and write-downs.

After consolidating through July, Cronos Group stock fell hard on the earnings report. The company also racked up costs related to a review of last year's financial results. That review concerned purchases and sales made through its business-to-business channel.

Before the pandemic, Canadian pot companies said U.S. retailers have expressed reluctance on selling CBD products after the FDA began cracking down on some sales.

Canopy Growth Stock Chart
Canopy Growth stock is consolidating. The stock rose in August, after quarterly financial results beat expectations.

The company said it was seeing "improved sales velocity and market share performance," after losing ground in Canada's recreational weed market in the fourth quarter. The company also said its cheap pot brand, TWD, made up a bigger sale percentage of its flower — or dry bud — products.

When the company reported results for the prior quarter, management said they didn't move quickly enough to capture more of the cheap weed market.

Under the leadership of Canopy's new CEO, David Klein, the company has worked to undo the efforts by former CEO Bruce Linton. Linton tried to expand globally into early, undeveloped cannabis markets and strike big, headline-grabbing deals elsewhere. But as losses piled up, he was ousted last year.

The company in May announced a strategic "reset" that would narrow its focus on selling products that could deliver the most profit in Canada, the U.S. and Germany. It plans to operate "asset light" models in Latin America and the Asia-Pacific.

"This means we will not be seeking geographic expansion," Klein said. The company has pulled back from other international operations.

In June, Canopy reworked its deal to buy a U.S. pot company, Acreage Holdings (ACRG), in a way that would potentially reduce its price and other obligations.

Tilray Stock Chart

Tilray stock spiked to 300 on Sept. 19, 2018, but it's been mostly downhill from there for the July 2018 IPO. Shares remain below their 50-day line and have been largely flat since April.

The company's second-quarter results, reported in August, missed expectations.

Tilray in May said a subsidiary, High Park Gardens, would shut down over the next six weeks, in an attempt to cut costs.

Aurora Cannabis Stock Chart

Aurora Cannabis stock jumped in May, after the company reported quarterly sales that beat expectations. But it lost more money than expected. Analysts still expressed reservations about the company's cash position.

Aurora in May rolled up its stock to give investors one share for every 12. The New York Stock Exchange warned it could be delisted after its average stock price fell below one dollar for 30 straight trading days.

Aurora Cannabis stock also rose in May after the company announced an acquisition to enter the U.S. retail CBD market for the first time. Meanwhile, co-founder Steve Dobler retired from the positions of president and director at the end of June.

In July, Aurora said it would cut staff in Europe and shrink other operations there.

Aphria Stock Chart

Aphria stock is also consolidating, with a potential buy point of 5.35. The stock broke out in late July. But the advance quickly flopped.

Stifel last month upgraded shares to buy.

"We find a discount multiple for the shares which we believe undervalues its improving growth prospects," analyst Carter said. "We estimate robust sales growth validated by consistent market share gains complemented by profitability, disciplined capital allocation, and progressive capital structure management."

Innovative Industrial Properties Stock Chart

Innovative Industrial Properties stock has broken out of a handle of a cup base with a 101.58 buy point. The stock is extended from that entry. The stock is above its 50-day line.

Innovative Industrial Properties buys properties from pot growers and then leases them back. Roth Capital recently said in a research note that more purchases were likely ahead, as the real-estate investment trust tries to lock in gains before potential federal reforms open up more banking and financing options to the cannabis industry.

Roth said "the sale-leaseback model remains the nondilutive capital raising method of choice for many operators and (Innovative Industrial) remains the industry leader with unmatched access to capital compared to its peers."

Marijuana Industry ETFs
Amid the volatility in marijuana stocks, one way to avoid stock-specific risk is via ETFs. The ETFMG Alternative Harvest (MJ) ETF, which tracks the cannabis industry, began a rebound in May. But it is still down from highs reached in 2018.

The AdvisorShares Pure Cannabis ETF (YOLO) cleared a cup base with a 11.99 buy point. The ETF has rebounded since March. But it is still well below the highs it held when it began trading last year.

Are Marijuana Stocks Buys Right Now?

The coronavirus pandemic will be a crucial test of how much people want, or need, weed if the economy endures further suffering. It's not clear which marijuana stocks will be longer-term winners. Difficulties continue to build up. Even as some marijuana stocks tighten up into consolidations, profits are still inconsistent.

So are marijuana stocks a good buy right now? Maybe.

Investors who are particularly eager to get into the sector could pick up marijuana stocks that are consolidating once they clear their current patterns and enter into a buy zone. But the earnings outlook remains tough, and the legalized pot market continues to faces challenges from illicit suppliers.

Ideally, IBD's research shows, investors would be better served looking for stocks with better fundamentals and that are closer to their highs.