Cronos Group (NASDAQ:CRON) stock didn’t give investors the reaction they were hoping for on Thursday.
But regardless of the post-earnings sell-off, Cronos and competitor Aphria (NASDAQ:APHA) may have combined to successfully turn the tide for marijuana stock investors this week.
Huge Headlines for Aphria Stock and Cronos Stock
After a difficult few months for marijuana stock investors, Aphria blew expectations out of the water last Friday. APHA stock skyrocketed 41% after the company released a dream earnings report. Aphria reported C$15.8 million in net income and an almost 1,000% increase in revenue from a year ago. Revenue was even up 75% quarter-over-quarter.
That same day, Cronos reported a $300 million buyout of U.S. CBD brand Lord Jones. The deal marks Cronos’ first venture into the American CBD market following passage of the Farm Bill last December.
The positive reaction for CRON stock was tempered on Thursday when investors took profits following the earnings report. However, Cronos stock price remains up 7.6% overall from a week ago. And its numbers weren’t necessarily bad. Cronos tripled its net revenue and tripled its kilograms sold in the second quarter. Net revenue was up 58% quarter-over-quarter, while cost of sales grew just 12%.
Relief for Marijuana Stock Investors
When it comes to earnings reports, marijuana stock investors should prepare for years of the same story. Expect high revenue growth, heavy losses and rising costs. This is the recipe of an industry that is in the early stages of a long-term growth opportunity.
When the market can’t necessarily rely on noisy numbers, it instead focuses on the story. Story stocks like Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) have long traded on headlines rather than numbers. At this point, the entire marijuana stock group is trading on headlines.
The huge jump in Aphria stock certainly got investors’ attention. Likewise, Cronos’ aggressive push into the U.S. CBD market also gave investors something to get excited about this week.
For months, cannabis stocks have slumped on negative headlines. The biggest two headlines came in July when Canopy Growth Corp. (NYSE: CGC) founder and co-CEO Bruce Linton was pushed out of his position. Shortly thereafter, CannTrust Holdings (NYSE:CTST) was busted by regulators for illegal growing activity.
In the past week, the Aphria earnings jump and the Cronos CBD deal have changed the cannabis narrative from negative to positive. That narrative is critical for investor sentiment and stock performance.
“… both events showed that negativity increasingly built into the cannabis sector was probably a bit myopic, especially as both companies’ drivers were from non-Canada cannabis, e.g. Aphria helped by non-cannabis int’l distribution sales, and Cronos by a US CBD deal,” Bank of America analyst Christopher Carey wrote in an Aug. 5 note.
Where the Story Goes Next
In the months ahead, the marijuana stock story will be dominated by a handful of core themes. New deals (or lack thereof) will be big. U.S. CBD deals, conditional U.S. marijuana distribution deals and/or additional partnerships with beverage and tobacco companies will certainly drive sentiment.
Canadian supply is another major factor. Investors were impressed by Aphria’s stellar growth numbers. But for now, Canadian suppliers are not keeping pace with demand. Rising Canadian supply and its impact on pricing and margins for Canadian growers will be a primary focus for investors.
Finally, any headlines about legalization and/or regulation will drive sentiment for cannabis stocks. In the U.S., investors will be watching closely to see the marijuana platforms of President Donald Trump and the eventual Democratic nominee heading into the 2020 election. In Canada, investors will be watching for other provinces to potentially follow in Quebec’s footsteps in imposing regulations on marijuana consumables. Quebec has begun limiting abuse by banning certain types of edibles and restricting additives that alter flavor and color.
There’s no doubt Aphria and Cronos have given cannabis stocks a much-needed boost in investor sentiment. But cannabis stock investors need more encouraging headlines to keep that momentum positive in the weeks ahead.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
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