It’s one of Wall Street’s best-kept secrets – a studied market anomaly that helps investors ride a move after a company reports an earnings surprise. And right now looks like a great time to apply this strategy to the cannabis sector after two of the most exciting cannabis stocks just crushed fourth-quarter expectations.
I’m talking about post-earnings announcement drift (PEAD) – the tendency for stocks that beat earnings expectations to deliver outsized returns in the following weeks and months.
Here are some more details from Wikipedia.
Once a firm’s current earnings become known, the information content should be quickly digested by investors and incorporated into the efficient market price. However, it has long been known that this is not exactly what happens.
For firms that report good news in quarterly earnings, their abnormal security returns tend to drift upwards for at least 60 days following their earnings announcement. Similarly, firms that report bad news in earnings tend to have their abnormal security returns drift downwards for a similar period. This phenomenon is called post-announcement drift.
2 Cannabis Stocks That Crushed Earnings Expectations by 144%
Trulieve Cannabis Corp (CSE: TRUL, OTC: TCNNF) is one of the largest cannabis stocks in the U.S. with a market cap of $5.5 billion. Headquartered in Florida, Trulieve is a direct play on Florida’s high-growth medical cannabis industry. Trulieve owns 78 dispensaries in Florida and has a cultivation capacity of 1.9 million square feet.
Trulieve has been cashing in on the high-growth Florida medical cannabis market. Trulieve just reported impressive fourth-quarter results that crushed expectations. Earnings of $0.33 per share beat the analyst consensus estimate of $0.24 by 40%. According to the PEAD, Trulieve shares should drift higher in the next few weeks and months as investors price the good news into shares.
In the meantime, Trulieve shares have been on fire. Trulieve is up 650% in the last year, surging higher with the broader cannabis sector.
Green Thumb Industries (CSE: GTII, OTC: GTBIF) is also one of the largest cannabis companies in the U.S. with a market cap of $6.5 billion. Headquartered in Chicago, Illinois, Green Thumb is a broad play on the U.S. cannabis industry. Green Thumb operates in 12 states, has permits for 97 retail locations and 13 manufacturing facilities.
Green Thumb just reported fourth-quarter results that also crushed expectations. Earnings of $0.11 per share beat the consensus analyst estimate of $0.05 by 103%. According to the PEAD, shares of Green Thumb should drift higher in the next few weeks and months as the good news is priced into shares.
Green Thumb shares have also been surging, jumping more than 500% in the last 12 months. Looking forward, shares should benefit from the PEAD as investors price the good news into shares.
The Big Picture
The Post Earnings Announcement Drift is the tendency for stocks that beat earnings expectations to rise in the following weeks and months. Trulieve and Green Thumb are two early cannabis industry leaders that just crushed earnings expectations.
According to the PEAD, these two stocks should drift higher in the next few weeks and months as investors price the good news into shares.
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Author Michael Vodicka owns shares of Green Thumb Industries (GTBIF).
About the Author & Cannabis Stock Trades
Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.
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