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Are Marijuana Stocks, ETFs Poised for Upbeat Earnings?

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Coronavirus crisis dealt a blow to the broader investing world initially, pushing Wall Street into bear market in mid-March. But marijuana — the one zone that performed badly even during rosier times of the stock market — seems to be returning to health in this difficult phase.

It’s been a volatile journey for marijuana stocks in the past year. Earnings weakness, regulatory issues, “longer-than-anticipated product rollouts and overly enthusiastic forward estimates” have hit the space hard (read: Cannabis ETFs Are Soaring in 2020: Will the Trend Continue?).

Pure-play marijuana fund ETFMG Alternative Harvest ETF (MJ - Free Report) has plunged 66.8% in the past year, against the 3.3% slide in the S&P 500. However, the marijuana ETF has gained 12.7% versus the 15.3% uptick in the S&P 500 in the past one month. Though the pot fund has underperformed the S&P 500 amid the pandemic, double-digit gains showed signs of hope.

What Made the Surge Possible Past Month?

Sales have also been strong for marijuana amid the latest virus outbreak. “Between the time period of March 16 and March 22, key US markets, including California, Colorado, Oregon and Alaska experienced a 50 percent rise in sales of recreational cannabis, and a 41 percent rise in medical cannabis sales from the same period last year,”per a cannabishealthinsider article. Oregon’s cannabis sales surged 37% year over year in March, its highest monthly uptick.

Amid widespread COVID-19-related lockdowns and store closures, many cannabis dispensaries received “essential business” designations, noted Global X. As a result, consumers hoarded medicinal and recreational cannabis in the quarter, which should result in better revenues for the pot companies.

Sales are surging in Canada too where the new recreational cannabis market, named Rec 2.0, was launched in late 2019. Aurora Cannabis (ACB - Free Report) recently stated that Rec 2.0 products could account for about 20% of total sales.

New store openings are another positive. In first-quarter 2020, Canada opened 191 new stores taking its total to 806, per the Global X report. The United States has nine times more dispensary licenses than Canada, which should facilitate more store openings in the coming days in the United States.

Investors should note that sin stocks tend to perform better even in the time of recession. During the global financial crisis, alcohol consumption jumped 7.2% in 2008-09 from 2006-07 levels while total sales in the consumer discretionary sector fell 9.35% over that time frame. With marijuana apparently being an addictive item, sales are expected to remain almost unruffled in the ongoing recession.

How Are Q1 Earnings Shaping Up?

Zacks Rank #3 Tilray (TLRY - Free Report) and Aurora Cannabis, with Earnings ESP of 0.00% and +9.09%, are expected to report on May 11 and May 14, respectively. Positive ESP suggests that analysts have recently become bullish on the company's earnings prospects. 

Per our proven model, the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank #3 Canopy Growth Corporation (CGC - Free Report) and HEXO Corp. (HEXO - Free Report) with an ESP of 0.00% and +25.00%, are expected to report on Jun 18 and Jun 11, respectively. All these stocks come from a favorable Zacks industry.

Will the Uptrend Last for Long?

If cannabis companies come up with better earnings for the first quarter of 2020 for higher retail sales, then the uptrend in those companies’ shares would take a dive in Q2 as people won’t run out of their stock very soon. So, sudden spike in sales would flatten in the next quarter. Still, investors with a long-term investing view may find cannabis as a decent bet.

Notably, regulatory backdrop holds the wild card for the industry’s well-being. Most Democrats have recommended marijuana legalization in their campaign. However, Republicans are yet to give a green signal. Analysts are now of the view that the United States may now be forced to give a nod to the recreational marijuana selling to cover up some of the massive economic damages caused by the coronavirus pandemic.

Though nothing has happened on this front, sheer possibility can keep the space hot in the near term. So, investors can keep close tabs on marijuana ETFs like AdvisorShares Pure Cannabis ETF (YOLO - Free Report) , Cambria Cannabis ETF (TOKE - Free Report) , Amplify Seymour Cannabis ETF (CNBS - Free Report) , Cannabis ETF (THCX - Free Report) and Global X Cannabis ETF (POTX - Free Report) .

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