Can earnings and new regulation boost cannabis stocks?

After legislation was delayed and institutional investors continue to shy away from investment in the space, cannabis stocks have slumped. However, with the bill to legalise it back in Congress and businesses improving, these stocks could see growth.

Shares of marijuana firms such as Tilray [TLRY] and Canopy Growth [CGC] surged last month after a key bill returned to Congress and a string of encouraging earnings reports spurred a much-needed rally for the long-bearish cannabis market.

Cannabis markets have been on a rough ride of late. Key barometers like the AdvisorShares Pure Cannabis ETF [YOLO] and the Global X Cannabis ETF [POTX] have dropped 59.8% and 71.3% over the past 12 months to 3 March, respectively, and the market has shown few signs that it can stage a meaningful recovery.

The industry’s fortunes may have been offered a lifeline on 4 February with the return of the SAFE Banking Act, part of President Biden’s America COMPETES Act of 2022. The SAFE Banking Act has been the major pivot dictating the moves experienced in cannabis markets. Designed to “create protections for financial institutions that provide financial services to cannabis-related legitimate businesses and service providers”, the act would effectively open up investment opportunities to risk-averse institutions and could offer some stability to the volatile market.

Much of the hype surrounding cannabis stocks has been tied to this legislation, but this is the sixth time that the bill has passed through the House of Representatives to Congress, and with 2022 an election year in the US, its passage is likely to face a no less difficult legislative journey than it did in its previous five appearances.

In light of the recent resurgence deep into a bearish stretch for cannabis markets, we take a look at three beaten down stocks and where they could go over the long term.

Better Q2 for Canopy Growth

One of the main factors behind last month’s cannabis market drive was Canadian firm Canopy Growth’s promising third-quarter earnings, which were announced on 9 February.

Though it is still operating on a net loss, figures showed that this had narrowed to CA$108.9m, a significant improvement on losses of CA$904.4m in the same quarter a year ago.

CEO David Klein is hopeful the company can strengthen its position moving forward. “We’re streamlining our portfolio of brands…to create more of a simplified operating environment,” he said after the firm’s Q3 announcement.

Along with improved efficiency, the company achieved new highs with sales of its Storz & Bickel CBD vaporisers and sports drink BioSteel, with sales of the latter jumping 130% year-over-year in Q3.

Despite the positive developments, several points of concern emerged from the announcement. Net revenue fell 8% from the year-ago quarter, and it also saw a 21% drop in cannabis sales.

Off the back of this mixed set of results, investors seem to have adopted a bearish stance on the share price, which has dropped 24.3% since the earnings announcement to close at $6.98 on 3 March.

According to 20 analysts polled by the Wall Street Journal, CGC has a consensus ‘hold’ rating and an average price target of $7.89.

CFRA’s Garrett Nelson also maintained a ‘hold’ rating, but reduced his target price from $14 to $10, offering a note of caution to investors following a recent bullish run for the stock.

Can Tilray stay green?

Tilray’s stock has been on a ride to open 2022, having jumped 15% after historic earnings saw profits in the green for the first time on 11 January, only to subsequently drop 30% to $5.22 on 27 January. Though the share price managed to claw back some of the losses made in the growth shares pullback, it is now down 22.9% year-to-date, after cannabis stocks were sent reeling last month.

In its Q2 earnings announcement on 10 January, Tilray reported a 20% jump in earnings but a 32% reduction in expenditure as the firm streamlines. Notably, it posted profits of $6m, up from a $89m loss the same period last year.

However, with market share and cannabis sales down 15.6% from $58m to $49m, a small profit might be a pyrrhic victory for Tilray. Since 1 February, the firm has seen shares drop 9.1%, which could be a sign of investor wariness over the real successes of the stock this quarter.

Some analysts are still bullish on Tilray’s stock: according to The Street, Cowen analyst Vivien Azer has a 12-month price target of $23, considerably higher than the stock’s current trading value.

Azer is very much an outlier, however, with WSJ analysts giving the stock a consensus ‘hold’ rating. And with the stock now sliding, and earnings figures showing a significant drop off in market share, Tilray could represent a serious risk for investors, with GLJ’s Gordon Johnson telling The Street that Tilray could be a “company teetering on the edge of disaster”.

Sundial Growers lifeline

Sundial Growers [SNDL] shares demonstrate the importance of institutional investment for cannabis stocks to steady. Despite being the most-traded stock on Robinhood Markets in 2021, it spent the year in a tailspin, dropping 63% over the past 12 months.

The decline has brought the stock dangerously close to slipping under the threshold for trading on a major index. Trading well below the $1 price tag required for listing on the Nasdaq Composite, the bid price for Sundial’s common share was not in compliance with the exchange’s minimum price requirement. According to an SEC filing made on 8 February, the firm has until 8 August 2022 to regain compliance.

This not exactly bright news nonetheless managed to put the stock on an upward trajectory, recording growth of 7.4% in the week ending 17 February. Since then, though, it has come back down to earth, closing 3 March at $0.51, well below its benchmark target, perhaps a sign that investor excitement has worn off even for firms yet to announce quarterly earnings.

Analysts remain cool on Sundial shares and see the stock failing to meet the Nasdaq’s price requirement. According to TipRanks, the stock has a consensus ‘hold’ rating and an average price target of $0.94.

The company is set to release quarterly earnings on 17 March, so investors are advised to watch closely to see if strong earnings could give the stock licence to buck the bearish turn the industry has faced over the past few weeks.