Why Interest in These 3 Weed Stocks is High

Key Points

• Tilray and Canopy aim to improve their positions in the U.S.
• SNDL has a diversified revenue model and strong cash position but has failed to win over investors.
• Interest in cannabis stocks will have to last for a comeback to take root.

One the worst performing and least-traded groups of 2022, the cannabis sector has suddenly caught fire.

The spark that has investors dabbling in weed stocks again was not a blockbuster earnings report or social media hype. Instead, it came from President Joe Biden.

On Thursday, Biden announced sweeping reforms designed to decriminalize marijuana. He asserted that those convicted of a federal marijuana possession offense will be pardoned and law enforcement’s policies around the drug will face a thorough review.

The news brought much-needed relief to many cannabis stocks crushed by stalled legislative momentum and disappointing financial results. A more lenient government stance on recreational marijuana use could pave the way for dispensary and retail expansion and might offer the shot in the arm the industry needs.

Along with renewed interest in medical marijuana companies, Biden's long-awaited push sent cannabis ETFs flying off their lows late last week. The Roundhill Cannabis ETF BATS: WEED, for example, ran more than 50% over two sessions before succumbing to broader market weakness and profit taking.

At the individual stock level, trading volume for weed stocks has been through the roof for many names. Is the recent flare-up a sign of more to come?

Why is Tilray’s Volume Spiking? 

Friday’s volume on Tilray Inc. (NASDAQ: TLRY) was nearly five times its 90-day average as traders became heavily reacquainted with the former parabolic runner. Now in penny stock territory, traders gobbled up cheap shares in hopes that Biden’s reforms will ignite a turnaround.

Tilray had some additional news of its own to keep the rally going in the form of its fiscal 2023 Q1 earnings call. The company reported $153.2 million in revenue and a net loss of $0.08 per share, both of which fell short of Wall Street estimates. However, management maintained its guidance for $70 million to $80 million in adjusted EBITDA to assure investors that the outlook for the next few quarters remains positive. 

The largest generator of ex-U.S. cannabis revenue enters its new fiscal year as the global leader in the medical cannabis market and the top adult-use cannabis business in Canada. It aims to improve its position in the U.S. market by expanding its distribution of craft beverages and various hemp, CBD and wellness products. 

Is Canopy Growth Corporation Expanding in the U.S.?

Canopy Growth Corporation (NASDAQ: CGC) joined in on the cannabis rally but the surge was short-lived. After climbing 22% Thursday, the stock gave back all of the gains and then some on Friday.

The Canadian producer of dried flower, oils, beverages, edibles and topicals seemed to get attacked by short sellers, which have pummeled Canopy since it soared above $50 early last year. Since the company has a limited presence in the United States, the Biden news has little direct impact on Canopy’s near-term financials. Instead, the stock got lumped in with others as a popular sympathy play. 

That’s not to say Canopy may not have greater U.S. exposure in the future. Beginning early next year, its ready-to-drink BioSteel drinks are being rolled out in more than 2,000 Walmarts NYSE: WMT across 39 states. Better yet, BioSteel just became an official hydration partner of the NHL, giving it league-wide access to valuable marketing channels. These deals, combined with the rollout of its Wana and Acreage brands, could make the U.S. an increasingly important growth market in 2023 and beyond.

What is SNDL’s Business Model?

SNDL Inc. (NASDAQ: SNDL) had one of its liveliest trading weeks since enacting a 1-for-10 reverse split in late July. The former Sundial jumped 23% on Thursday, but like Canopy (and others) it backpedaled hard the following day.

The company operates approximately 350 retail outlets across Canada that sell liquor and cannabis products in addition to operating its own indoor cultivation facility. This makes it the country’s largest private liquor and cannabis distributor and creates a self-sufficient business model that lacks dependence on external cannabis sourcing.

SNDL has no U.S. exposure, which is largely why bears were quick to pounce on the stock’s post-Biden reaction. However, it has two of Canada’s leading cannabis retail brands in Spiritleaf and Value Buds. The pair combined to generate $63.5 million in second quarter revenue, almost half of what its trio of liquor store brands brought in. 

Despite one of the most diversified revenue models and strongest cash positions in its peer group, SNDL has failed to win over investors. Much of this relates to a slowdown in consumer spending on cannabis products after the pandemic fueled high demand. 

The lack of profitability that plagues SNDL and others is another reason the cannabis group has fallen woefully out of favor with the market. Interest in these stocks will have to last much longer than two days for any sort of a comeback to take root.