What Do Canopy Earnings Say About Cannabis ETFs?

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” hit the space hard. Most stocks lost more than half of their value.

Regulatory Backdrop & Earnings Hold the Key

Entering 2020, regulatory backdrop became extremely important. The latest report shows that up to a dozen states could legalize adult-use or medical marijuana in 2020 through the power of legislatures or ballot measures (read: Cannabis ETFs Are Soaring in 2020: Will the Trend Continue?).

On a positive note, a U.S. congressional committee passed a legislation in late November to end the federal embargo on weed. But an approval by the full House and Senate should take time and will likely see many revisions in the process. Cannabis 2.0 — the next wave in the rollout of legal marijuana products in Canada — which kicked off in December, will act as the biggest catalyst for the industry. These are high-margin products including vapes, edibles (like chocolates, cookies and gummies) and infused beverages like juices and beer.

Against this backdrop, the companies started reporting quarterly results, wherein the industry biggie Canopy Growth Corporation (NYSE:CGC) sprang a sweet surprise to investors on Feb 14. The stock was up 13.4% on the day in response to its earnings results. The very financial release, in fact, acted as a cornerstone for the entire industry.

Tilray (NASDAQ:TLRY) was up 7.8% on the same day, HEXO Corp. (TSX:HEXO) gained 19.7%, Aurora Cannabis (TSX:ACB) added about 7.5%, Cronos Group Inc. (NASDAQ:CRON) returned 6.8% and Aphria Inc. (APHA) inched up 3.6%.

Inside Canopy’s Earnings

Canopy Growth offering dry cannabis and oil products, primarily under the Tweed and Bedrocan brands belongs to a favorable Zacks industry (placed at the top 33% of 250+ industries). Canopy's net revenue of $94.0 million and net loss of per share of 27 cents fared far better than the respective consensus estimate of $79 million revenues and a loss of 36 cents per share. Revenues jumped 49% year over year while losses were narrower than 67 cents witnessed in the year-ago-quarter.The gross margin rose from 13% to 34%, beating the consensus estimate of 25%.

ETFs in Focus

Such upbeat results from the biggest industry player gave hints that the prolonged downturn in the cannabis space could be a thing of the past now.

Given this scenario, investors can keep a close tab on marijuana ETFs like AdvisorShares Pure Cannabis ETF YOLO (down about 3.8% YTD), Cambria Cannabis ETF TOKE (down 5.2%), ETFMG Alternative Harvest ETF (CSE:MJ) (down 2.8%), Amplify Seymour Cannabis ETF CNBS (down 4.3%), Cannabis ETF THCX (down 4.3%) and Global X Cannabis ETF (BO:POTX) (down 6.8%). These ETFs could be up for a rebound if there are more clear signs of recovery in the concerned domain.

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