77% Sales Growth Makes this Cannabis Leader a Buy

The most important time of the quarter has arrived for cannabis stocks.

Earnings season is the time when companies reveal sales and earnings results for the previous quarter – and just as important, companies provide guidance on what investors should expect for the following quarter.

Quarterly earnings that beat expectations have a documented history of driving shares higher in the following weeks and months.

On Wall Street, this pattern is known as the post-earnings announcement drift (PEAD).

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.

Right now is a great time to apply this well-tested trading strategy to the cannabis sector. The largest cannabis company in the world just reported strong second-quarter results that beat expectations.

According to the PEAD, this company’s share price should drift higher in the next few weeks and months. That makes this a great time to take a fresh look at this industry leader.

Cannabis Leader Crushes Earnings Estimates

Canopy Growth Corp. (TSX: WEED, NYSE: CGC) is the largest cannabis company in the world with a market cap of $8.7 billion. Headquartered in Ontario, Canopy is a broad play on the global cannabis industry with operations in Canada, the United States, South America, and Europe.

Canopy had a terrible year in 2019. Sales fell far short of lofty expectations and shares fell more than 75% from the 52-week high.

Canopy responded by hiring a new CEO who is on a mission to grow sales, cut expenses, and deliver the company to profitability.

After Canopy reported second-quarter results on November 9, it became clear the company is executing its plan. Here are some more details from the earnings report.

Revenue came in at $135 million (CAD), better than the expected $118 million (CAD) and was up 77% from the same period last year.

While revenue was on the rise, expenses fell sharply.

  • SG&A (Selling, General & Administrative) expenses declined by 20% versus Q2 2020.
  • Share-based compensation expenses decreased 76% over Q2 2020.

The dramatic improvement helped Canopy crush earnings expectations. Canopy reported a net loss of $0.09 per share, better than expectations of a loss of $0.37 per share.

The strong performance tells me that Canopy shares should benefit from the Post Earnings Announcement Drift (PEAD) for the next few weeks and possibly months.

The potential for the PEAD comes at a time when Canopy is already looking strong on the chart. After plunging in 2019, shares began to stabilize in 2020. Now it looks like Canopy has established a long-term bottom between $15 and $20 and shares have been rebounding nicely from this key level of support. This looks like it could be the beginning of a new, multi-year trend higher like we saw from 2016 to 2018.

Take a look at the chart below.

This Big Picture on the PEAD and Canopy

Companies that beat earnings expectations have a history of seeing their share price rise over the following weeks and months.

Canopy Growth Corp just reported strong second-quarter results that beat analyst expectations, triggering the PEAD. That tells me shares have a high probability of drifting higher in the next few weeks and months.

Michael Vodicka owns shares of Canopy Growth Corp (CGC, WEED).

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.