Finding an Attractive Pick Among 12 Cannabis Stocks

Cannabis sector in July

Overall, the cannabis sector was weak in the first ten days of July. There was a stream of negative news about the sector. Earlier this week, CannTrust (CTST) reported that Health Canada found non-compliant operations at one of its facilities. According to the press release issued by CannTrust, the company was growing cannabis in rooms that weren’t licensed. As a result, ~7,500 kilograms of the inventory was put on hold. The news sent CannTrust stock nearly 38% lower in two days. To learn more, read CannTrust Fell, Sent Other Cannabis Stocks Into the Red.

In other news, Canopy Growth (WEED) (CGC) announced that Bruce Linton, its co-CEO and board member, will step down. Initially, the announcement weakened the sentiment. As a result, Canopy Growth stock faced selling pressure.

In July, the weakness in the cannabis sector was visible in the sector ETFs. The Horizons Marijuana Life Sciences ETF has lost ~5% of its value in July, while the ETFMG Alternative Harvest ETF has been almost flat.

Valuations

All of the negativity in the sector impacted cannabis stocks’ valuations. We’ll discuss the sector’s valuations in July. We’ll compare the sector valuations to their historic levels.

Finding an Attractive Pick Among 12 Cannabis Stocks

In the above chart, the yellow line shows the median valuation multiple for 12 cannabis sector stocks. You can see a list of the stocks below the chart.

The sector’s forward EV-to-sales multiple has moved sideways in July. The sideways trend has continued since March. Currently, the peer median valuation multiple is 5.8x—slightly below the average of 6.3x since March. The current forward EV-to-sales multiple is also trading at a discount to the average of 7.9x since January of 2017. The cannabis sector’s valuation multiples have been under pressure in July.

Next, we’ll plot the 12 cannabis stocks’ comparable multiples. The stocks are part of our sector median valuation multiple. The comparable multiple is be used to compare one company with its peers. We can also compare each stock’s valuation multiple with the peer average.

Comparing 12 cannabis stocks

We used 12 cannabis companies to conduct our comparative analysis from a valuations perspective in July. We grouped the companies into two sets—trading at a premium and trading at a discount.

Finding an Attractive Pick Among 12 Cannabis Stocks

Trading at a premium

The “trading at a premium” group includes stocks that are trading above or at a premium to the peer median multiple in the current month. The group includes five of the 12 stocks.

All five of the stocks were trading at a premium to the peer median of 5.5x as of Thursday. Canopy Growth was trading at 10.7x. The company’s valuation multiple was lower than its historical average over the past 2.5 years. Tilray was trading at 12.5x, which was higher than the peer median. However, Tilray’s valuation multiple fell significantly from its historical average of 43x.

Aurora Cannabis was trading at 13.9x. Cronos Group was trading at a forward multiple of 25.4x. Innovative Industrial Properties was also trading at a premium to the peer median at 22.1x. These three stocks saw their valuation multiples rise above their respective historical averages.

We think that these stocks are attractive especially when they fall below their historical average multiples.

Trading above the peer median

When a stock trades above the peer median, it could be overpriced. The stock could be better than its peers in terms of growth prospects. The stock could also have a lower risk. As a result, the stock would deserve a premium. Historically, these five stocks have consistently traded at a premium to the peer median. The five companies have better prospects relative to their peer group. To learn more, read Investing in the Cannabis Industry.

Trading at a discount

The “trading at a discount” group includes seven stocks. Some of the more popular stocks in the group are Aphria (APHA), CannTrust, and HEXO (HEXO). These three stocks were trading at 2.98x, 2.2x, and 4.8x, respectively. Read How Does Aphria Plan to Reach the One Billion Club? to learn more.

Aphria and CannTrust have faced internal issues. Aphria came under pressure due to weak corporate governance practices. CannTrust had non-compliant operations at one of its facilities.

OrganiGram, Supreme Cannabis, KushCo Holdings, and Green Thumb Industries were also part of the group. The stocks were trading at a forward multiple of 5.5x, 2.9x, 1.9x, and 2.2x.