2018 was truly a banner year for cannabis stocks, thanks to the U.S. mid-term elections and, of course, Canada's legalization of recreational marijuana.
But the measure of good investments is an ability to maintain gains and return value to shareholders. That measure has proved somewhat more elusive for pot stocks in the still nascent industry, with many stocks remaining volatile throughout the calendar year, so far.
Significantly, many stocks have fallen notably over the course of the second- and third-calendar quarters, as pricing pressures increase and a race for acquisitions becomes more aggressive. Questions on debt financing for such transactions also abound.
Without the promise of a new market such as the U.S. opening up any time soon, many stocks have stagnated into the back half of the year. Others have simply never recovered the euphoric sentiment that was sustained ahead of Canadian deregulation.
Still, with positive results flowing through from Aphria (APHA) , encouraging preliminary sales numbers from Aurora Cannabis (ACB) , a strong run for Canopy Growth Corporation (CGC) since its post-legalization plummet, and optimism building for a turnaround Tuesday earnings for Tilray (TLRY) , many investors might be willing to wade back into the weed leaders' stocks for the long term.
"Updates have the potential to bring the focus back to the strong revenue growth opportunity prevailing in both the fully federal legal Canadian market as well as the state-licensed U.S. market," Stifel analyst W. Andrew Carter said ahead of the sector's two biggest earnings reports on Tuesday.
"Canada's second wave has the potential to refute the overly bearish narrative around cannabis regarding commodification with the potential that the products consistently harness cannabis' active ingredients yielding predictable outcomes for the consumer."
He suggested that breakthroughs in disruptive medical applications, consumer packaged goods offerings, or recreational delivery methods could be key catalysts for the overall industry.
Additionally, for companies backed by bigger players in the medical and pharmaceutical space, there remains a cushion for M&A action and near term losses.
For the time being, there remains caution as both Canopy Growth later this week and Tilray today will need to take that building optimism forward, especially as less emphasis is placed on major legislative appeals following the pops of late 2018.
"Questions around the expense of achieving growth in the highly regulated category, the pace of category development often slowed by regulators and policymakers, and the need for incremental capital asks amidst intense sector pressure are likely to remain key themes constraining any meaningful lift for the sector in the short-term," Carter concluded. "We remain appropriately cautious on cannabis valuations in the short-run."
Tuesday's after market earnings will be pivotal to proving whether or not the caution was justified or if pot stocks are yet again ready to burn up and take speculative portfolios higher.