Earnings season is slowing down. That doesn't mean there still aren't stocks to watch, though.
Here are two names I'm watching this week.
Cronos Group (March 26)
Canadian cannabis company Cronos Group (CRON) has put together some big revenue growth through the past few years. But only so much momentum can be gained from revenue growth, as the expenses incurred by these companies as they ramp up production levels for a recreational market have hampered earnings.
Names like Canopy Growth (CGC) , Tilray (TLRY) , Aphria (APHA) (I own this one), and Aurora Cannabis (ACB) have all been tossed around as the likely leaders of sales, but each has encountered hiccups. Each has a market capitalization that's rather unrelated to its actual financials.
In 2017, Cronos increased its revenues five-fold to C$4.08 million (Canadian currency). It also produced a profit of $2.49 million, a significant improvement over a year earlier. Of course that amounted to a penny per share in diluted earnings, and really didn't justify the share performance. But this is a growth stock, and investors were far more concerned with sales potential.
These days, though, things are getting a little more focused on earnings. There's still a great deal of speculation running in these stocks, but chatter does emphasize earnings a little bit more than before. There's also interest in where the supply and demand actually is at in Canada.
In the third quarter Cronos reported a big increase in revenues to C$2.25 million. In conjunction, net earnings flipped to a loss of C$7.21 million vs. gains of C$1.1 million the year prior.
I can give a pass to these companies that are taking losses due to the heavy costs that are created by increasing production capacity and shipping inventory. The big thing that will hold this stock up is the C$1.8 billion investment from Altria Group (MO) . That cash infusion is going to give Cronos the capital needed to carry out its operations and expansion regardless of losses in the short term.
As a whole, I expect the company's fourth-quarter results to show much higher sales thanks to recreational shipments, and much wider losses thanks to the costs of that growth. Since the company has so much investment capital from the Altria deal, focus will be on sales potential and how they'll work with Altria, who has control of 45% of the stock.
The stock is still valued far beyond what any company with full-year estimates for a loss of C$0.06 per share should be trading at. That always leaves room for big fallout if the earnings results disappoint relative to expectations.
Lululemon (March 27)
I admittedly thought lululemon athletica (LULU) would have topped out a few years ago. Nevertheless, the athleisure titan has charged on.
I haven't liked the way total net income stagnated over the past few years. The company created revenue growth, but earnings were up and down between fiscal 2014 and 2018. The stock has also traded at higher P/Es than I like, and it still does. That doesn't seem to stop lululemon, though, as the company has blazed forward with strong growth this year.
Through the first three quarters of the fiscal year ending in January 2019, lululemon revenues are up 23.25% year over year to $2.12 billion. Gross profits are up 31% to $1.15 billion. Operating income was up to 17.7% of income vs. 11.6% last year; and net income is up a strong 91% to $265.3 million.
Rising net income combined with lower shares outstanding drove the company's diluted earnings per share up 93% to $1.97. It's hard to kill a stock's momentum when the company is producing that kind of growth.
Excluding an expense related to tax reform, the company provided full-year guidance of $3.65 to $3.68 per diluted share. Going off of that guidance, lululemon's stock is currently trading at around 39x full-year earnings. That's an expensive stock folks, which probably explains why the shares have pulled back lately.
Ownership of LULU has become a question of valuation versus the momentum of earnings growth. I come down on the cautious side of the equation here, and view LULU as way overpriced at present.
The earnings strength of late makes it a "hold," but the stock continually gets future gains baked into it, lowering the appeal by forcing investors to pay a big premium to get involved. Still, I've been wrong on the short-term performance of this stock before and good results this week will likely keep this one boosted. That just seems to be the trend with LULU. If results disappoint, the premium might take a hit.