Cannabis earnings season just got off to a great start, with one of the world’s largest cannabis companies reporting a big surprise. That sent shares of this early global leader up by 26% in just one day.
While that’s impressive on its own, according to one of Wall Street’s best-kept secrets, this stock is headed for more gains.
The post-earnings announcement drift (PEAD) is the tendency for a stock’s cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks (or even several months) following an earnings announcement.
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 the post-earnings announcement drift. CXO Advisor Group
The PEAD demonstrates that companies who beat earnings expectations tend to see shares rise in the following weeks and months.
This looks like a great time to put the PEAD to work in the cannabis sector.
What’s The Long-Term Outlook for Tilray?
Tilray (NASDAQ: TLRY) is one of the largest cannabis companies in the world with a market cap of $7 billion. Tilray is headquartered in Canada and is a strong play on the Canadian cannabis industry. But this company also has one of the best international footprints in the industry as an early market leader in Europe, South America, Australia, and New Zealand.
Tilray’s strong international footprint fueled impressive sales growth. Tilray shares exploded one day after reporting better-than-expected fourth-quarter earnings. Here are the highlights from the press release.
- Net revenue increased 25% to $142.2 million during the fourth quarter from $113.5 million in the prior-year quarter.
- Net income of $33.6 million during the fourth quarter compared to net loss of $84.3 million in the prior-year quarter.
The big jump in profit was triggered by $121.5 million in non-operating income after the company locked in a gain on its convertible debt. However, even when backing out one-time, non-recurring profits, Tilray’s loss of $0.11 cents per share still came in ahead of the FactSet consensus estimate of $0.12.
This positive earnings surprise is good news for shareholders.
According to the PEAD, this positive earnings surprise is a signal that Tilray shares should drift higher.
If Tilray Doesn’t Drift
And even if the PEAD fails, Tilray will still benefit from a number of powerful catalysts that are directly on the horizon.
On the recent earnings call, Tilray CEO Irwin Simon shared a very optimistic forecast. Simon expects the company to generate $4 billion in annual revenue by 2024.
Tilray also expects to achieve a total of $80 million in cost savings in the 18 months after combing with Aprhia. They’ve already achieved $35 million in cost savings.
And finally, Tilray said it expects the U.S. to legalize cannabis at the federal level in the next 18-24 months.
The company doesn’t have a huge presence in the U.S., but the company is working hard to change that. Tilray recently purchased U.S.-based craft brewer SweetWater for $300 million. The plan is to use SweetWater’s infrastructure and distribution to create and distribute cannabis-infused drinks in the U.S.
Are Tilray Shares Forming a Long-Term Bottom?
Tilray shares jumped higher early in the year. However, they’ve been trapped in a bear market for the last six months.
It looks like shares are stabilizing and forming a long-term bottom between $13 and $15. Looking forward, we expect Tilray to continue rising due to the strong quarter and the PEAD coming into play.
The Big Picture on PEAD and Tilray
The PEAD shows that when a stock delivers a positive earnings surprise, shares tend to drift higher in the following weeks and months.
This looks like a good time to apply the PEAD to Tilray. The company reported strong fourth-quarter earnings that came in ahead of expectations.
Look for Tilray shares to drift higher in the coming weeks and months as the good news attracts new investors into shares.
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.
Mr. Vodicka brings his expertise and guidance to the members of Cannabis Stock Trades.
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