Believe it or not, marijuana stocks proved fallible in April. Although spring typically brings the green, the Horizons Marijuana Life Sciences ETF, a broad-based cannabis fund holding around four dozen pot stocks of various weightings, lost 1.6% during the month of April.
Then again, don't start crying the blues for pot stocks, with the Horizons Marijuana Life Sciences ETF up a cool 51% through the first four months of the year. With the cannabis industry expected to hit between $50 billion and $75 billion in annual sales perhaps a decade from now, investors are willing to overlook temporary hiccups for an opportunity to get their piece of the pie.
April's best pot stocks
Of the 52 marijuana stocks I track, 27 ended the month of April higher, with 25 lower. But among the top performers, 10 pot stocks managed to gain at least 15% (when rounded to the nearest whole number). In descending order, here are the 10 best marijuana stocks in April:
- Valens GroWorks (NASDAQOTH:VGWCF): Up 58%
- Planet 13 Holdings (NASDAQOTH:PLNHF): Up 51%
- 22nd Century Group: Up 28%
- Neptune Wellness Solutions: Up 25%
- Constellation Brands (NYSE:STZ): Up 20%
- Flower One Holdings: Up 19%
- HEXO (NYSEMKT:HEXO): Up 19%
- Shopify (NYSE:SHOP): Up 18%
- Canopy Growth (NYSE:CGC): Up 17%
- Cresco Labs (NASDAQOTH:CRLBF): Up 15%
With the exception of 22nd Century Group, which has been a regular on the worst-performers list in recent months, the remaining nine companies on this list have been powering to or near new highs. The catalysts behind these impressive gains can be broken down into a few categories.
Specialty companies are thriving
Probably the biggest "wow" factor of this list is that the top performers aren't well-known pot stocks. In fact, there's a pretty good chance you've never even heard of Valens GroWorks or Planet 13 Holdings before. But these specialty companies are certainly getting investors excited, as evidenced by their April performance.
Valens GroWorks is a provider of extraction services for cannabis and hemp companies. Since derivatives have much higher margins than traditional dried cannabis flower, the desire of growers to broaden their product pipeline with resins and distillates is high (pun fully intended). Last month, Valens and HEXO entered into a two-year agreement that will see HEXO supply Valens with 30,000 kilos of cannabis and hemp biomass in the first year, and 50,000 kilos in the second year. In return for a broadened product portfolio for HEXO, Valens GroWorks lands itself a healthy fee-based service from Canada's sixth-largest grower by peak annual production.
Meanwhile, Planet 13 Holdings' 16,200-square-foot SuperStore off the strip in Las Vegas is the largest cannabis dispensary in the country. Thus far, it has lived up to the billing, with the average number of daily visitors rising from 1,848 in November to 3,194 in March. Mind you, this warehouse will be adding a coffee shop, pizzeria, event stage, and consumer-facing processing site by the third quarter. Having recently visited Planet 13's flagship store, I found it to be set up to drive margins, and was especially impressed with its product diversity and technology integration.
Wall Street weighs in, and shareholders rejoice
Another pretty big catalyst during the month of April was Wall Street, which weighed in on a handful of big-name pot stocks. Covering initiations and upgrades certainly lit a fire under Canopy Growth and HEXO.
Roughly two weeks ago, GMP Securities upgraded Canopy Growth to a buy rating and assigned a new price target of nearly $54 a share on the company. In the view of GMP analysts, there's a strong likelihood that federal legalization will occur in the United States within the next 90 months. If you're wondering why the random timeline, it's because Canopy announced a deal in April to acquire Acreage Holdings for $3.4 billion, contingent on the fact that the federal government legalizes marijuana. The scope of this cash-and-stock offer is good for 90 months. In other words, GMP foresees Canopy gaining a leg up on its competition once legalization does occur in the United States.
Then there's HEXO, which was initiated as a top pick by Bank of America. It's certainly an interesting top pick given that Jefferies lists HEXO as one of its two sell-rated pot stocks. B of A covering analyst Christopher Carey notes that HEXO is among the most de-risked of all growers given its five-year, 200,000-kilo-in-aggregate deal with its home province of Quebec. Carey also believes HEXO is primed for value-added dealmaking, beyond just its joint venture with Molson Coors Brewing. Interestingly, just a week after this note is when HEXO and Valens GroWorks formed their partnership.
Earnings results power ancillary pot stocks higher
Earnings reports haven't exactly been a strong suit of pure-play pot stocks in the early going. However, for established ancillary players that are merely dipping their toes into the high-growth cannabis pond, earnings results have provided quite the boost.
In early April, Modelo and Corona brewer Constellation Brands wowed investors, despite reporting only 2% growth in fourth-quarter sales from the year-ago period. A decision to sell part of its wine and spirits business to E. & J. Gallo Winery for $1.7 billion, coupled with nearly 10% beer shipment volume growth in fiscal 2019, got investors excited. Not to mention, Constellation Brands' investment in Canopy Growth is paying off, with unrealized gains from its 37% equity stake helping to lift full-year net income by 49% to $3.4 billion.
On the final day of April, shares of cloud-based multichannel commerce platform provider Shopify soared after reporting stellar first-quarter operating results. Shopify delivered $320.5 million in revenue, a cool 50% year-over-year increase, with merchant solutions revenue up 58% and subscription solutions increasing 40% from the previous year. Shopify aims to make a name for itself as a point-of-sale solution for Canada's pot industry, regardless of whether it involves online, mobile, or brick-and-mortar sales. Shopify's platform will also help marijuana retailers understand the buying habits of their customer base for the first time.
Dealmaking intrigues investors
Lastly, it was pretty evident that investors were excited about the dealmaking announced in April. Aside from the aforementioned Canopy Growth deal to buy Acreage Holdings, which sent Canopy higher than it did Acreage, investors were pleased with the news that Cresco Labs plans to buy Origin House in an all-stock deal valued at $823 million.
Cresco Labs is a vertically integrated dispensary operator focused on the United States, so the proposal to buy Origin House, a cannabis distributor looking to grab hold of significant market share in California, was a bit of a head-scratcher initially. However, should the deal close, it would give Cresco Labs, which grows its own cannabis and develops its own brands, an opportunity to push its brands into more than 500 California dispensaries. Cresco would also gain control of valuable distribution market share in what's arguably the most lucrative marijuana market in existence right now.
Considering all of the above, exciting things are happening in the marijuana industry.