For investors focused on companies supporting or engaging in the research, development, distribution and sale of recreational and medical marijuana, cannabis stocks. Amyris
, GrowGeneration Y Tilray can help grow your portfolio.
Moment in the legalized marijuana industry
The marijuana industry is comprised of companies that support or are involved in the legal research, development, cultivation, production, distribution, marketing, and sale of recreational and medical marijuana. It is a unique combination of different firms and business models focused on the marijuana industry, such as suppliers, retailers, real estate and technology, as just a few examples. Legal marijuana sales in 2020 reached a record $ 17.5 billion, a 46% increase over 2019.
Cannabis has been gaining wider acceptance and has been legalized in an increasing number of nations and states for medicinal, recreational and other uses. Currently, in the US, 16 states, including the District of Columbia, have fully legalized adult marijuana use and 35 states have approved it for medicinal use.
Recreational marijuana received a green light from legislators over the past six months in five new states: Arizona, Montana, New Jersey, South Dakota and Virginia. Meanwhile, four additional states are now considering legalization: Connecticut, Maryland, New Mexico and North Dakota. One of the biggest drivers of this policy change is the revenue states would receive from marijuana taxes.
Most of the purely marijuana stocks are not publicly traded and are still very risky due to different state laws and applicable US federal laws. Marijuana remains illegal at the federal level. Many large marijuana companies have continued to post sizable net losses as they focus on investing in resources and equipment to accelerate revenue growth. The industry is maturing and growing, but it remains volatile and there are likely to be periods when prices deviate from fundamentals.
Cannabis Stock Classification with AAII A + Stock Ratings
When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one of the reasons why AAII created the Investor Stock Grades A +, which evaluates companies through five factors that have been shown to identify stocks that outperform the market in the long term: value, growth, momentum, revisions to earnings estimates (and surprises) and quality.
Using these grades, the following table summarizes the attractiveness of three cannabis stocks (Amyris, GrowGeneration, and Tilray) based on their fundamentals.
AAII A + Stock Classification Summary for Three Cannabis Stocks
What the A + stock ratings reveal
Amyris (AMRS) is an industrial biotechnology company. The company is primarily focused on applying its technology platform to design, manufacture and sell high-performance, natural and sustainably sourced products in the health and wellness, clean beauty, and flavor and fragrance markets.
Amyris has been working to create synthetic cannabinoids (chemical compounds in the cannabis plant) that could disrupt the industry and make it less dependent on large and expensive grow facilities. Its technology platform enables users to rapidly engineer microbes and use them as catalysts to metabolize renewable plant-based sugars into high-value, high-volume ingredients.
Its biotechnology platform and industrial fermentation process replace existing complex and expensive manufacturing processes. The company’s platform is used to design, build, optimize and improve strains that produce eight different molecules in commercial volumes, up to more than 15 commercial ingredients.
Amyris has an F value rating, based on her score of 98, which is considered ultra expensive. The company value score ranking is very high on several traditional valuation metrics, with a score of 84 for the price-sales ratio, 99 for the Business value / Ebitda ratio (EV / Ebitda) and 89 for shareholder return (remember, the lower the score, the better the value). Successful stock investing involves buying low and selling high, so stock valuation is an important consideration in stock selection.
The value grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the Earning rate over price, price-book value And price-free cash flow ratio.
Amyris has a Momentum Grade of A, based on its Momentum Score of 96. This means that it ranks in the top tier of all stocks in terms of its weighted relative strength over the past four quarters. The four-quarter weighted relative strength range is the relative price change for each of the last four quarters.
Estimate revisions provide an indication of what analysts think about a company’s short-term prospects. Amyris’s estimated review rating is F, which is considered very negative. The rating is based on the statistical significance of your last two quarterly earnings surprises and the percentage change in your consensus estimate for the current fiscal year over the past month and the past three months.
Amyris has posted negative earnings surprises in its last two fiscal quarters, primarily due to increased marketing investments in consumer brands and new research and development (R&D) programs. Additionally, over the past month, the consensus earnings estimate for the fiscal year ending December 31, 2021 has decreased significantly from negative $ 0.12 per share to negative $ 1.38 per share; there have been three downward revisions to the fiscal year 2021 estimate and zero upward revisions.
GrowGeneration (GRWG) is an agricultural supply company. The company owns and operates hydroponic and organic specialty gardening retail outlets. It is engaged in the sale of products, such as organic nutrients and soils, advanced lighting technology, hydroponic and aquaponic equipment and other products necessary for growing indoors and outdoors. The company’s products include harvest, soils and media, containers and trays, pest and disease control, nutrients and additives, hydroponics, grow lights, fans and ventilation, and cloning and propagation. It also operates an online superstore for growers.
Hydroponics is one of the best growing methods for the legal cannabis industry, and GrowGeneration is one of the leading suppliers of hydroponic equipment in the US.
Its subsidiary, GrowGeneration Hemp Corp., is engaged in the development and sale of agricultural hemp products. It owns and operates a chain of approximately 55 hydroponics / gardening retail stores. The company serves a community of commercial and urban growers who grow specialty crops including organics, vegetables, and plant-based medicines. The company expects to expand to 60 garden centers in 2021 in 15 states.
GrowGeneration has an average A + growth grade of A. The growth grade considers short-term and long-term historical growth in revenue, earnings per share, and operating cash flow.
The company has shown strong sales growth over the last year. Sales increased 172.7% year-over-year for the quarter ended March 31, 2021, to $ 250 million, while adjusted earnings per share grew more than 280%. The company expects to generate sales between $ 415 million and $ 430 million in 2021. GrowGeneration is scheduled to provide a business update presentation at the Stifel 2021 Virtual Cross Sector Insight Conference on Thursday, June 10.
The company has a Momentum Grade of A, based on its Momentum Score of 83.
Tilray (TLRY) is dedicated to the pharmaceutical sector. The company is a supplier of cannabis products to pharmaceutical distributors. The company focuses on medical cannabis research and the cultivation, processing and distribution of cannabis products around the world. Through its subsidiary, FHF Holdings Ltd. (Manitoba Harvest), it manufactures, markets and distributes hemp-based consumer products. The Manitoba Harvest portfolio includes Hemp Hearts, Hemp Oil, Hemp Yeah! granola, hemp Yes! protein powder and Hemp Bliss milk.
Tilray also supplies cannabis products to patients in various countries on five continents through its subsidiaries in Australia, Canada and Germany, and produces medicinal cannabis in Canada and Europe.
On May 3, Tilray announced that it had completed its merger with Aphria Inc. The two companies, operating in the cannabis-focused consumer packaged goods space, will operate as Tilray. The Tilray-Aphria merger has united Aphria’s leadership in the Canadian recreational cannabis market with Tilray’s strength abroad.
A higher quality stock has characteristics associated with a potential upside and reduced downside risk. The quality grade backtesting shows that stocks with higher quality grades, on average, outperformed stocks with lower grades during the period from 1998 to 2019.
The A + quality grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, repurchase yield, change in total liability to assets, accruals, bankruptcy risk score (Z) double main Z and F score. The score is variable, which means that you can consider all eight measures or If any of the eight measures is invalid, the remaining measures are valid. However, to be assigned a quality score, stocks must have a valid (not null) measure and a corresponding ranking for at least four of the eight quality measures.
Tilray has a quality grade of D, which places it near the bottom of all stocks listed in the US The company ranks poorly in terms of return on assets and gross income on assets, ranking respectively at the 14th and 10th percentile of all stocks traded in the US, however, it ranks highly in terms of its change in total liabilities to assets, at the 85th percentile.
Tilray has a Momentum Grade of A, based on its Momentum Score of 92 and an Average Growth Grade of C.
Actions that meet the criteria of the approach do not represent a “recommended” or “buy” list. Due diligence is important.
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