The 3 Biggest Things to Look for in Marijuana Earnings Reports

Marijuana is going more mainstream every single day. For investors, the dream for years now has been getting rich on pot stocks, given the multibillion-dollar potential of the industry.

Much of the marijuana industry still remains a “black market,” but that’s changing every day.

For the dream to become reality though, companies selling cannabis products will have to prove that potential.

The proof will come in the form of earnings and won’t just benefit individual companies, but the entire industry.

Hype can only go so far. Eventually, investors need to see results.

For example, take a look at the roller coaster of highly publicized pot stocks, Tilray Inc. (NASDAQ: TLRY).

This Canada-based marijuana company took off in advance of the drug being legal in its home country.

The stock traded at $30 per share a year ago and skyrocketed to nearly $150 per share last October.

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Then reality set in. The marijuana stock gave up much of its gains to settle around its current price of $55 per share.

That may be disappointing if you bought the stock at $150, but not if you were an early pioneer at $30.

The one-year gain for Tilray is almost 100%, easily crushing the returns of any other instrument available.

In order for the stock to return to the $150 range and above, Tilray needs to prove to the market that it can turn a profit in the industry.

How does a company prove itself to the market?

The answers come during earnings season.

Marijuana earnings reports give investors the data they need to properly assign a valuation to the stock.

In most cases, the value of a business is the discounted value of future profits. But there’s a catch with marijuana companies. Most have no earnings.

Investors have to look at other things often overlooked by the market.

Some of those things include quarterly revenue.

If there are no profits, then watching revenue progress is hugely important.

That said, in the case of marijuana stocks, revenue too may be volatile.

We have to dig a bit deeper to find the nuggets this earnings season that will indicate sufficient progress at the individual company level.

In so doing, we can then better gauge the future prospects of our investments in these high-flying stocks.

Here are the three biggest things to watch for in marijuana stock earnings reports:

Marijuana Earnings Report Tip No. 3: Expansion Plans

In the cannabis market, nothing will better indicate potential success than examining the expansion plans of a particular company.

Where is future growth coming from? How is the company doing penetrating new markets where marijuana is now legal?

Expansion is the lifeblood of growth.

Without it, it makes little sense to pay a premium valuation for the stock, even marijuana stocks.

For example, cannabis beverage company New Age Beverages Corp. (NASDAQ: NBEV) recently announced a big distribution deal with Walmart.

That’s the sort of expansion plan that will be very positive for any stock. So pay close attention to the earnings report for any announcements relating to expansion.

Marijuana Earnings Report Tip No. 2: Cash and Cash Burn Rate

As mentioned above, most marijuana companies are losing money.

That means capitalization is critical for surviving long enough to carve out a piece of the trillion-dollar pie.

The best way to judge if a company has enough capital to survive the period of operating losses is to monitor the cash and cash burn rate.

If the burn rate is slowing, that should be interpreted as a very positive sign.

If the burn rate is accelerating, I would be concerned.

One big reason to worry is when a marijuana company goes to the public market to raise capital to manage the cash burn rate.

That means dilution and more stock on the market, lowering the value of the company to current investors.

In the world of “prove it to me now,” the current cash burn rate is critical to watch for any pot stock investor.

Marijuana Earnings Report Tip No. 1: Projections

Losses can only be tolerated for so long before investors become anxious.

That anxiety will manifest itself into selling pressure – similar to what we saw with Tilray over the last six months.

This is where projections and guidance from the earnings report come in handy.

Management must be able to tell the market what is on the horizon with respect to both revenue and profit.

In the quarterly report, these projections are truly the most important barometer worth watching, especially for companies in the earliest stages of operations, like pot stocks.

Any signs of weakness toward the future, and investors will likely sell first and ask questions later.

The ultimate goal is to make money in the market, and marijuana companies need to show that they can be profitable.

Otherwise, the huge premium on valuations will disappear.

On the other hand, strong projections can be the trigger for more share price gains.

Keep a close eye on the projections and compare to previous statements.

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The 2018 midterm election was a turning point for the cannabis industry.

We expect nothing short of historic profits by the end of the year.

But not all pot stocks will hand you life-changing wins. In fact, often the companies making headlines are least likely to see the biggest gains.

These three stocks, on the other hand, are flying under the radar… for now. Each of them could see exponential stock price acceleration at any moment, and if you get in before that happens, you could turn a token stake into a lifetime of wealth.

I don’t know of any other sector providing anywhere near this level of growth now.

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