Best Cannabis Stocks: Data-Driven Analysis Of Stocks For Potential Gains In A Cannabis Bull Market
Updated: Jul 13, 2022
When it comes to investing in the stock market, my view is that an analysis of the sector must precede an analysis of individual stocks or ETFs. Prior to (or soon after) reading this article, I recommend reading the series of articles in the INVESTING category to get an overview of the cannabis investing thesis.
The following analyses were done to rank the best stocks in the Cannabis sector:
1. PS Valuation Analysis: valuation analysis using PS Ratios for cannabis stocks in multiple Bull Market and Bear Market scenarios
2. Revenue Growth Analysis: to identify cannabis stocks with the highest Decade to date (DTD) revenue growth
3. AEBITDA Analysis: to highlight cannabis stocks with positive quarterly Adjusted EBITDA
4. Cannabis ETF Analysis: to identify stocks favored by the fund managers of the MSOS, MJ and YOLO ETFs, and specifically those that would benefit the most when funds flow back into the cannabis sector
5. Hype Analysis: to quantify the impact of being listed on the Nasdaq vs OTC, and to have a strong and motivated investor base, measured in terms of Stocktwits Watchers.
The table below shows a data-driven analysis to identify the Best Cannabis Stocks based on the various factors mentioned, to find a balance between fundamentals and hype:
Based on this methodology, the following stocks are the highest ranked:
The 5 Tier 1 MSOs (in order of revenue): Trulieve Cannabis, Curaleaf Holdings, Green Thumb Industries, Cresco Labs, Verano Holdings; High Tide, WM Technology, Tilray Brands and smaller MSOs (in order of revenue): Columbia Care (being acquired by Cresco Labs), Ayr Wellness, Ascend Wellness, Jushi Holdings and TerrAscend.
All these stocks ranked well on multiple criteria and are top picks worth further due diligence and inclusion in a Cannabis Portfolio. The rankings are expected to change based on performance of each company and stock. The chart and analysis will be updated on a regular basis and updates will be announced on Twitter and Stocktwits.
Each stock in the sample size of 15 used for this analysis has a quarterly revenue of around US$50 million or higher from cannabis. The sample size includes US and Canadian companies, stocks listed on Nasdaq (senators) and OTC (gladiators), and those I have categorized as apriums (vertically integrated retail and production), plums (licensed producers) and apples (cannabis technology). Irrespective of market capital, companies making less than around US$50 MM in cannabis quarterly revenue have been excluded in this analysis for now.
The criteria used is cannabis related revenues. Tilray was included because it makes US$50 MM+ quarterly revenue from its cannabis segment. Others with high overall revenue, but low cannabis revenue were excluded. For example Village Farms, which makes only 40% of its revenue or approximately US$ 30MM quarterly revenue from cannabis, was excluded. The various cannabis ETFs often include stocks in the ancillary, real estate, tobacco and other sectors, like Innovative Industrial Properties (IIPR), GrowGeneration, Philip Morris, Altria, etc. These have been excluded, with the focus of the analysis on companies with primarily cannabis production, distribution, retail, ecommerce, technology and/or pharmaceutical segments contributing to revenue.
To determine the ranking, a point system was used. Using the 80/20 rule (Pareto Principle), 80 points out of 100 were awarded on fundamentals driven metrics: PS Ratio, % of Revenue Growth (Quarter over quarter) for the decade starting Q1 2020, and % of quarters with positive AEBITDA for the decade starting Q1 2020. The remaining 20 points were awarded to external factors: ETF ownership, Exchange of the stock’s listing and number of watchers on Stocktwits.
The most important criteria (awarded 50 points) was the valuation rank, measured in terms of PS Ratio. PS Ratio was the metric chosen because the sector is in a growth phase and a revenue based metric is, IMO, more relevant in this phase than an earnings based metric, like the price-to-earnings (P/E) ratio.
The points are calculated to show higher points for undervalued companies (low PS ratio) and lower points for higher current valuations. The formula used in Valuation points = (25-PS)*2. The points keep decreasing as the PS ratios rise with stock performance, investor sentiment and potential Cannabis bull market. The points go to zero if the PS hits or exceeds 25.
The detailed analysis based on PS valuations with potential gains for multiple Bull Market scenarios is in the Cannabis Bull Market Scenario Analysis with PS Ratio Valuation page. The relevant table is presented below.
Also presented on this blog is a detailed analysis based on PS valuations for multiple Bear Market scenarios on the Cannabis Bear Market Scenario Analysis with PS Ratio Valuation page.
The second analysis done was an analysis of the Revenue Growth for the quarters in the decade starting Q1 2020. The Best Cannabis Stocks table (in this page) shows the average Quarter over Quarter (QoQ) growth for the decade. Revenue Growth points were awarded as 1 point for every % of average QoQ growth. The maximum 15 points were awarded for 15%+ average growth. The detailed analysis is provided in the Revenue Growth Analysis: Cannabis stocks with the highest Decade to date (DTD) revenue growth page. The relevant table is presented below.
It is fascinating to see that many of the vertically integrated apriums including most of the US MSOs and High Tide have experienced an average quarterly revenue growth in excess of 15%.
This is an incredible growth rate. Growth will continue with progress in legalization at the state and/or country level, consumption trends and the increase in the legal cannabis market vs the illicit market. The corresponding PS valuations visible in the same table, highlight the disconnect between price and value in the market, as many are trading at single digit PS in spite of the consistent high revenue growth.
The third analysis done was an analysis of the Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (AEIBITA) for the quarters in the decade starting Q1 2020. The Best Cannabis Stocks table (in this page) shows the percentage of quarters that posted positive AEBITDA. AEIBITDA points were awarded at 0.15 point for every % of Positive Quarters %. The maximum 15 points were awarded for companies with positive AEBITDA in 100% of the quarters. The detailed analysis is provided in the AEBITDA Analysis: Cannabis stocks with positive quarterly Adjusted EBITDA page. The relevant table is presented below.
The main contribution of this analysis is to identify companies with consistently negative AEBITDA quarters, with zero points awarded to those who have never (in this decade) posted a quarter with positive AEBITDA. The analysis does also highlight the superior fundamentals of the vertically integrated apriums.
The analyses listed above rank the companies in terms of the fundamentals used in this methodology. As with every methodology, there are limitations. I have done the best I could with my limited resources and tried to keep it balanced and unbiased. Metrics such as PS Ratio and AEBITDA are industry recognized, and metrics I have used for the balance of relevance and simplicity. For those who want to do a more detailed analysis, this analysis can be used in addition to the analysis of any other metrics (such as net income, cash, debt, enterprise value, etc) that seem relevant.
Before we proceed, please review the table in this page once again specifically for the highest ranked stocks with cells highlighted in green. Look at the PS valuations in the low single digits, consistent quarterly revenue growth in the 15%+ range for this decade, and high percentage of quarters with positive AEBITDA. It is fundamentals and logic defying to see valuations lower, revenue growth higher and strong AEBITDA performance, compared to other sectors, including Technology and Electric Vehicles (EV). If you know of a sector with a superior combination of valuation, revenue growth and AEBITDA, please let me know via Twitter/Stocktwits.
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The next analysis done was to rank stocks favored by the fund managers of the MSOS, MJ, YOLO, CNBS and THCX Exchange Traded Funds (ETFs), and specifically those that would benefit the most when funds flow back into the cannabis sector.
ETF Ownership points were awarded 1 point for every % of company's market cap owned by these five ETFs. The maximum of 10 points are awarded when the ETFs own 10% or more of a company’s market cap. The detailed analysis of Cannabis ETFs is provided in the Cannabis ETF Analysis, MSOS ETF Analysis and MJ ETF Analysis pages. If you have not read these, I recommend reading them to see which stocks are ranked best, based on the data from the funds’ holdings. But I will summarize the insights below.
During a bull market, funds flow into a sector (i.e. sector rotation) not just into individual stocks but also into ETFs. The funds that are included in the ETF will benefit when the ETF gets inflows because the fund managers will invest in stocks they hold to keep holdings % consistent, or changed based on their discretion. The percentage of the ETF’s holdings in each stock is important because the stocks with higher holding % will tend to get more investment from the ETF’s new funds. But the more important metric is the % of the company’s market cap held by the ETF. The ones with higher ownership % by the ETFs will benefit disproportionately.
A point to note is that the stocks not held by the ETF will miss out when funds flow into the ETF. Hence an analysis of ETF holdings is a good way to filter out stocks not in favor with fund managers who are more qualified and experienced at stock picking than most retail investors.
The MSOS ETF invests in companies that make 50%+ revenue from the US. It includes several MSOs from my analysis: Trulieve, Curaleaf, Green Thumb, Cresco Labs, Verano Holdings, Columbia Care, Ayr Wellness, Jushi Holdings and TerrAscend. All were strong in terms of both metrics analyzed: the % of the company’s market cap held by the ETF, and changes in number of shares held.
Interestingly, the ETF excludes Ascend Wellness, a vertically integrated (aprium) US MSO. I decided to include them as a top pick, based on their high revenues and low PS Ratio. In spite of getting zero points out of ten for the ETF Ownership category, Ascend Wellness did rank strongly.
High Tide is also excluded from the MSOS ETF. This is because majority of the revenues currently are from Canada. As explained in my High Tide page, there is a probable scenario (post Nasdaq approval to sell THC products on US ecommerce platforms) in which 50%+ revenue at some future date will come from the US, prompting future inclusion in the MSOS ETF.
A point to note is that there are other ETFs that invest in the cannabis sector. But MSOS and MJ have the highest assets under management (AUM) in the Cannabis sector. For simplicity and the limited time/resources at my disposal, I have again used the Pareto Principle, and covered 80%+ of Cannabis ETF AUM.
Another point to note is that while the % of a company’s market cap held by ETFs is beneficial when funds are flowing into the sector, the opposite is also true. When funds are flowing out of ETFs, companies with high ownership in ETFs get disproportionately worse selloffs because the ETFs are selling shares into a deteriorating market.
The markets, however are not driven purely on fundamentals. In today’s meme crazy market, the share price is often impacted not just by fundamentals but also hype. It is difficult to quantify hype but I have done so by including two factors: the exchange where the stock trades (Nasdaq vs OTC) and the number of Stocktwits watchers the stock has.
My article Gladiators, Senators, the Colosseum and the Senate, shows my analysis of Nasdaq/NYSE vs OTC stocks and uses the analogy of the OTC as the dog-eat-dog Colosseum and the Nasdaq/NYSE as the Roman Senate. There is a clear premium awarded to stocks that are listed on the Nasdaq/NYSE, primarily because many institutional investors can’t invest in OTC stocks and hence don’t have any incentive to promote them to their clients or in the mainstream media.
I have granted 5 points to Nasdaq/NYSE listed stocks and zero to OTC listed stocks. This is not me being biased against OTC stocks and the US MSOs, but an attempt to quantify the impact of the exchange and to highlight the need for the US MSOs to get uplisted to get the recognition and valuations they deserve. Some would argue that the outperformance of Nasdaq/NYSE stocks (vs OTC) is so high that even 10 points for this factor would be justified, and I would agree. But I have given 5 points for this criteria and OTC stocks will get the 5 point boost as soon as they uplist. It is impressive to see that even with zero points in this category, the US MSOs are highly ranked in this methodology.
The final factor used to rank the best cannabis stocks is a data point to quantify hype. A company may be a great operator with strong and improving fundamentals. But if it is unknown, relative to peers with name recognition, it will continue to be undervalued in the sector. The Nasdaq listed plums (producers) have name recognition and the backing of institutions that can trade and invest in them. The OTC listed apriums (vertically integrated with retail and production) are lesser known and have less institutional backing because of their exchange.
A lesser known company will not just trade at lower multiples, but will also have lower volumes traded. This makes them less attractive to both investors and traders. To offset this, it becomes necessary to create hype and engagement with retail shareholders. Some Founders/CEOs have shown the initiative by engaging with shareholders on Twitter and Reddit. These include Ben Kovler (@bkov9) of Green Thumb, Kim Rivers (@rivers_kim) of Trulieve and Boris Jordan (@Boris_Jordan) of Curaleaf, who are active on the platform and have several thousands in followers. Raj Grover (@RajGrover_HITI) of High Tide is active on Twitter and has also conducted multiple Ask Me Anything (AMA) sessions on Reddit where he takes and answers shareholder questions.
Shareholder enthusiasm, which results in “buzz” or hype, contributes to the volumes and share price performance. If there is no demand for a company’s shares, the price will likely stagnate. I have used the metric of Stocktwits watchers as a way to quantify hype, which in combination with fundamentals metrics, should give a more balanced way to rank the best stocks. There is a correlation between watchers and volumes traded. This is especially impactful for stocks like Tilray Brands, which has the largest number of watchers. The hype has got the stock trending on multiple occasions on Reddit’s WallStreetBets (WSB), the group of retail investors responsible for the GameStop and AMC meme stock phenomenon.
I have awarded 5 points (maximum) for hype, quantified in terms of Stocktwits watchers, with 0.1 point awarded for every thousand watchers. The name recognized Nasdaq listed producers perform well on this metric. The others have some opportunities to increase name recognition and shareholder engagement. It is important to note that the US MSO are ranked highly in the overall Best Cannabis Stocks analysis in spite of low scores for the exchange and Stocktwits watchers. Ascend Wellness impresses me most, given that it received zero points for ETF Ownership (as its not included in the MSOS ETF), zero for exchange (as listed on OTC) and nearly zero for Stocktwits watchers with the lowest number of watchers, one of whom is me. I have started tracking Stocktwits metrics for my shortlisted stocks and the tracker is provided in the Stocktwits Watchers: A Metric to Quantify Hype page. The page also has links to the Stocktwits pages of all the stocks included in this Best Cannabis Stocks analysis. I’m curious to see how these metrics trend as the sector receives more awareness, investors and with it the inflow of investor funds.
The ANALYSIS category also has the Historic Bull Market Valuations page, which shows an analysis of historical bull market valuations of prominent cannabis stocks using PS Ratios from 2017 to 2022. One observation based on the historical valuations and various analyses presented is that there is a disconnect between fundamentals and valuations not just for the overall sector but also subsectors. The Licensed Producers (categorized as plums) tend to be valued at higher PS than vertically integrated companies (categorized as apriums) with retail and production components. Similarly the Nasdaq/NYSE listed stocks (categorized as Senators) tend to have higher PS valuations than the OTC listed stocks (categorized as Gladiators).
But several plums are excluded from my sample of 15 companies because they make relatively low quarterly revenues. And some of those that are included have low overall rankings because of unimpressive or stagnating growth and multiple quarters with negative AEBITDA. Cannabis is a commodity business and producers are at a disadvantage compared to companies vertically integrated with a retail presence. This factor seems to be lost to the market which continues to discriminate (with low valuations) the companies with a retail component. Main contributing factors would be the OTC listing of US MSOs and the limited participation of institutional investors. When legislation is eventually passed to change this, it is likely that the disconnect between fundamentals and valuation will be corrected, and vertically integrated apriums will trade at higher PS valuations than producers (plums).
If you haven't come to the conclusion by this point, I would like to point out that this is a contrarian analysis, favoring companies that are the underdogs of the underdog Cannabis sector. I am not usually a contrarian when it comes to investing, as my favorite stocks will always be high quality dividend paying stocks. But when it comes to Cannabis investing, I have a contrarian mindset and place value on companies that have retail (B&M and/or ecommerce) strength, as opposed to the well recognized producers. I do not suffer from the delusion of grandeur thinking that this blog will change the market's perspective of Cannabis stocks. But fundamentals eventually tend to matter in the stock market and I believe that a day will come when the thinking considered contrarian (like in this blog) will be considered the norm. Only time will tell how this plays out.
This data-driven analysis to identify and rank the best cannabis stocks to invest in was prepared for informational purposes, to provoke further thinking and analysis with the readers. The analysis is an attempt to bring balance to a misunderstood and underappreciated sector. This page and the pages with detailed analysis in the ANALYSIS category will be updated on a regular basis based on material changes. It will be interesting to see the rankings change based on the changes in the variety of factors included in this analysis.
The cannabis industry is still in its early stages and impacted by misconceptions rooted in stigma and ignorance. Many people still associate cannabis with tetrahydrocannabinol (THC), the main psychoactive compound in the miracle plant. But this original medicinal plant, used for thousands of years, provides more than a hundred compounds, called cannabinoids. Research on the health benefits of cannabinoids is on the rise, as is consumption of non-psychoactive cannabinoids including cannabidiol (CBD), cannabinol (CBN), cannabichromene (CBC) and cannabigerol (CBG).
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Disclosure: I (username Adastra) am an investor not a trader. I am bullish on the Cannabis sector as a long-term investment (2025 and beyond), provided stocks/ETFs are carefully picked based on data-driven due diligence. Of the 15 stocks covered in the Best Cannabis Stocks analysis, I own only High Tide, which I am holding as a long-term investment. But my analysis indicates (without any guarantees) that there is a potential for impressive gains in investing in the stocks best ranked in the analysis, including WM Technology, Trulieve, Curaleaf and any other stocks that will have a dedicated page. I reserve the right to buy or sell at any time any of the stocks mentioned in this blog. I do not short stocks and never will short any stock in a company that makes the world a better place. I do not have insider knowledge of any company covered in this blog. All data used for analysis is from public sources. I have received (as of last update date of this page) ZERO funding for this blog from any of the companies featured in this blog.