Making the Grade

Canopy Growth Corporation Is Our “Biggest Loser”

“In investing, what is comfortable is rarely profitable.”

This is one of my favorite insights from Robert Arnott, entrepreneur and chairman of investment management firm Research Affiliates LLC.

Essentially, it means you have to step outside your comfort zone for gains and take some risks. And during that time your mettle will be tested.

For marijuana investors, the last quarter was extremely uncomfortable. And the nerves of many a retail investor were frayed by months of declines.

The North American Marijuana Index tumbled 24% from April 1 to June 25.

But we’re now seeing some sparks of new life.

The past week has been exceptionally strong for pot stocks. In fact, the losses over the past month have been wiped out…

Chart - North American Marijuana Index

The North American Marijuana Index is now up a little more than 1% since the start of June.

And because of the bevy of positive headlines, this jump has been led by an impressive resurgence in U.S. cannabis companies.

Meanwhile, Canadian licensed producers (LPs) remain the dogs.

They’re down from where they were at the start of June. And a lot of that has to do with the recent earnings report from the world’s largest cannabis company, Canopy Growth Corp. (NYSE: CGC).

The bellwether is a market mover.

As I’ve talked about here plenty of times before – we all know that revenue growth is going to be there for cannabis companies. That’s not the issue.

It’s mounting losses that have plagued share prices.

So, in this week’s Making the Grade, my team and I decided to look at net income.

I took the most recent quarterly results and separated them into the biggest winners and losers.

Here are the biggest losers…

Chart - Pot Stocks Ranked by Net Income Losses

Canopy suffered a massive loss of nearly $250 million.

That eclipsed its more than $172 million in revenue.

We see the top three losers on net income are three of Canada’s largest LPs – Canopy, Aurora Cannabis (NYSE: ACB) and Aphria (NYSE: APHA).

As these companies expand, those losses are heading higher.

Fellow Canadian LP Tilray (Nasdaq: TLRY) also makes an appearance.

Still, the majority of the list is American multistate operators (MSOs): Acreage Holdings (OTC: ACRGF), Columbia Care (OTC: COLXF), MedMen Enterprises (OTC: MMNFF), Harvest Health & Recreation (OTC: HRVSF) and iAnthus Capital Holdings (OTC: ITHUF).

The same issues are impacting their balance sheets. They’re expanding into new markets, breaking ground on new dispensaries and gobbling up smaller competitors.

As investors, we should expect losses for the first couple of years. These companies are spending money now for potential growth later. All new markets take this path.

Now, what’s impressive is that Canopy’s loss is more than that of all of the American MSOs on the list combined…

But so is its market cap.

Tilt Holdings (OTC: SVVTF) and Green Growth Brands (OTC: GGBXF) also reported losses of more than $15 million in the most recent quarter. Both have aggressive expansion plans underway as well.

So you might be asking: Are there any pot stocks that are actually making money right now?

There are!

But because the industry is quite young, there aren’t many.

Here are some of those names…

Chart - Pot Stocks Ranked by Net Income Gains

Out in front is the Florida medical operator Trulieve Cannabis Corp. (OTC: TCNNF).

Things look bright for Trulieve, as the company was recently allowed to expand beyond the state’s dispensary cap.

We also have Canadian producers CannTrust Holdings (NYSE: CTST) and Cronos Group (Nasdaq: CRON). Both reported positive net income recently. As did CBD producers Medical Marijuana Inc. (OTC: MJNA) and Charlotte’s Web Holdings (OTC: CWBHF). Though those two are on opposite ends of the spectrum in terms of size.

Rounding out the list, we have those very attractive ancillary investing options. I’m talking cannabis real estate investment trust Innovative Industrial Properties (NYSE: IIPR) and greenhouse operator Village Farms International (Nasdaq: VFF).

On top of that, Innovative Industrial pays a dividend, making it truly attractive for marijuana investors. And shares have gained more than 170% year to date.

We just started a brand-new quarter yesterday, but we’re coming off of an uncomfortable stretch for pot stocks. Ultimately, I think we’re going to look back at those lows and wish we’d bought more.

Nonetheless, cannabis companies are still positive for the year. And it looks like we’re starting to see momentum shift back to the upside. That bodes well as we head into the second half of 2019 and look at all the catalysts on the horizon.

Here’s to high returns,

Matthew