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Marijuana Stocks in the Tank — Not a Good Time to Buy


From the perceptive of our proprietary Subjective Probability +Game Theory Model (SP+GTM), the algorithm shows a further decline in marijuana stock values primarily due to the lack of clarity in their respective business models. Other factors for lower prices are: (1) Over-valued capitalization based on major mistakes in execution can be attributed to inexperienced management and (2) Negative operating cash flow with an overcapitalized structure is a clear indication of fundamental weaknesses.

The result -- continual downward spiral in stock values.

Marijuana stocks received enormous hype after legal recreational sales took hold in Canada and sales became legal in some form or another across more than half of the U.S. Producers in Canada listed on the big U.S. exchanges, while their U.S. counterparts sought listings in Canada.

But marijuana stocks in 2019 plunged to new lows as predicted the year before by SP+GTM. Indeed, many of our readers followed the assessment and liquidated their long position and when short, reaping substantial profits. Shorting, or short-selling is when an investor borrows shares and immediately sells them, hoping he or she can scoop them up later at a lower price, return them to the lender and pocket the difference. Meanwhile, the marijuana industry is showing little profit growth as weed producers burn through money to expand. Sales growth, while still large thanks to legalization, has disappointed investors with lofty expectations created by inadequate business models. An under-supply, and more recently concerns of an oversupply, have hurt business. The aggressive expansion has been followed by layoffs, regulatory run-ins and vows to pull back and focus on profit.

Marijuana Stocks On U.S. Exchanges

SP+GTM ratings for marijuana companies in Canada trading on the big U.S. exchanges showed the biggest value deteriorated in the last 12 months. Negative rating have been posted for Cronos Group (CRON), Canopy Growth (CGC), Tilray (TLRY), Aurora Cannabis (ACB), Aphria (APHA), CannTrust (CTST),

Hexo (HEXO), Organigram (OGI), Acreage Holdings (ACRGF) and Curaleaf (CURLF). Sundial Growers (SNDL) went public at the beginning of August. Also, our negative rating holds true for Innovative Industrial Properties (IIPR), a cannabis-focused real estate investment trust. Innovative Industrial Properties stock currently gets the highest rating of the companies tracked, Greenlane (GNLN), a Florida-based company that distributes vaping products and accessories to smoke shops and dispensaries, debuted on the Nasdaq in April and Akerna (KERN), which makes compliance software for cannabis businesses and the agencies regulating them, began trading in June on the Nasdaq. Akerna went public after a merger with a blank-check company, a process that can be quicker and less stringent than an IPO.

Trends Influencing Marijuana Stocks

The bull case laid out for the industry is that there's still potential to take business away from the alcohol and pharmaceutical industries. The marijuana industry also points to the prospect of bigger deals with beverage companies, tobacco companies, and nations abroad that are relaxing their marijuana laws. The legalization of hemp in the U.S. has also led more of those companies — including Tilray and Canopy Growth — to seek arrangements to make hemp in the U.S. or to sell hemp-derived CBD products via mainstream retailers. Such moves could help boost sales and destigmatize cannabis. Investors, however, haven't been convinced. The sell-off in 2019 has hacked away at those market valuations, as profits remain scarce and choke points on the supply chain — whether at grow facilities or provincial distribution centers or pot shops themselves — hit sales. Bigger questions have surfaced over how much demand is actually there, how much financing is available, and whether a shakeout is on the horizon.An under-supply of cannabis hurt sales shortly after pot went legal in Canada. As cultivation picked up, the provinces that receive pot producers' weed — en route to retail stores — found themselves amply stocked, and thus bought less. Cannabis-industry executives have said Canada has been too slow to license stores to sell their product, which has also hurt the top line.

As for U.S. CBD sales, Tilray and Canopy, in November, said that many U.S. retailers were waiting for clearer guidance from the FDA before agreeing to sell CBD. The FDA, in November, didn't help, issuing an announcement saying that it "cannot conclude that CBD is generally recognized as safe."

All these negative factors were continually addressed by us over the last three years, blaming in part the inadequacies of predicting success on the "potential" of the hemp and marijuana markets, rather than the fundamentals.

Marijuana Stocks Fundamentals

Earnings growth, or at least the prospect of strong earnings, is a hallmark of top stocks. But the marijuana industry is losing money. The industry's billion-dollar valuations dwarf million-dollar quarterly sales figures. Not surprisingly, marijuana stocks have poor Earnings Per Share Ratings. Innovative Industrial Properties leads with an 88 EPS Rating out of a best-possible 99. Tilray stock has an EPS Rating of 1, the worst possible.

Marijuana Stocks Technicals

The Composite Ratings for marijuana stocks listed on the major U.S. exchanges, as of February, aren't great. The best rating for a pure-play pot producer went to Cronos Group stock, which stood at 42 out of a best-possible 99. The Composite Rating is a broad measure of a stock's performance, including earnings and various technical factors. All other pure-play marijuana stocks on the New York Stock Exchange or Nasdaq had ratings below 30. The relative strength lines of most marijuana stocks, which measure their performance against the broader S&P 500, have flattened or faltered. The one exception on Composite Ratings is Innovative Industrial Properties. It has an 88 Composite Rating.

Marijuana Stocks' Plummeting Chart Patterns

Throughout much of 2019, marijuana stocks fell. None have formed any base 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.

For the asking and without cost, technical charts are available for the stocks mentioned.


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