In case you haven’t noticed, cannabis is sort of a big thing on Wall Street. Between the beginning of 2016 and the first quarter of 2019, pot stocks were practically unstoppable. Many of the biggest names in the industry saw their share prices rise by well over 1,000% in just a shade over three years.
But the tide has decisively turned over the past five-plus months. Since the end of the first quarter, the Horizons Marijuana Life Sciences ETF, the first exchange-traded fund focused on cannabis, has declined by nearly 33% through Sept. 17, inclusive of dividends paid…
With few exceptions, marijuana stock profit estimates are plunging
Marijuana stocks throughout North America have been hit by a barrage of supply concerns, a persistent black-market presence, and high tax rates that have allowed illicitly produced weed to easily undercut legal-channel product on price. Worse yet, none of these issues is going to be resolved overnight, leading to the growing likelihood that weakness in pot stocks could continue for many quarters to come. As a result, we’ve witnessed forward-year consensus sale and profit projections tumbling across the board among marijuana stocks.
There have, of course, been exceptions to the rule. For example, cannabis real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR) has seen its per-share profit projections tick higher in recent months, which is mostly the result of the company acquiring new cannabis rental properties. REITs are typically a moneymaking model given their highly predictable cash flow and cost structure, with this predictability translating over to the cannabis space and Innovative Industrial. As the company continues to add new assets, its net operating income should increase.
We’ve also seen bottom-line projections for cannabinoid drug developer GW Pharmaceuticals (NASDAQ:GWPH) improve significantly over the past three months. GW Pharmaceuticals may not want to be called a cannabis stock, but its association with the cannabinoids of the cannabis plant has made its investors a pretty penny. The launch of Epidiolex, a cannabidiol-based oral solution designed to treat two rare types of childhood-onset epilepsy, has gone far better than anyone expected, with Wall Street analysts now believing GW Pharmaceuticals could be profitable on a recurring basis by next year.
The only Canadian cannabis stock with a budding profit outlook
But of the few marijuana stocks with rising earnings-per-share (EPS) estimates, practically all are located in the United States or United Kingdom. Comparatively, EPS estimates for pot stocks in Canada, the world’s only recreationally legalized adult-use market in the world, are plunging… with one exception: Aphria (NYSE:APHA).
According to a quick screen of Canadian marijuana stocks, Wall Street’s consensus forward-year profit projection for Aphria in fiscal 2021 has increased from CA$0.20 (that’s 20 Canadian cents) per share three months ago to CA$0.32 per share as of today. The bulk of this increase occurred a little over a month ago, shortly after Aphria reported its fiscal fourth-quarter results for 2019 and delivered a surprise profit.
On one hand, Wall Street was impressed with Aphria’s sudden surge in recreational sales, especially considering the supply issues that have impacted Canada. Adult-use revenue rose 158% from the sequential quarter to CA$18.5 million, and wound up representing the bulk of cannabis sold during the fourth quarter — total marijuana revenue was CA$28.6 million. The downside is that recreational users are typically a lower-margin consumer than medical pot patients. On the flip side, the market for adult-use weed trounces that of medical marijuana.
However, the real star might have been subsidiary CC Pharma, which Aphria officially acquired this past January. CC Pharma is a distributor of pharmaceutical products (including medical marijuana) to more than 13,000 pharmacies in Germany and throughout Europe. Although pharmaceutical product distribution is typically a high-sales, low-margin type business, it’s going to help provide Aphria with some semblance of predictable cash flow, even if it acts as a drag on overall company margins. In the most recent quarter, distribution revenue hit CA$99.2 million. In fiscal 2020, it’s possible that distribution sales could account for around half of Aphria’s sales…
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