It’s one of Wall Streets’ best-kept secrets – a studied market anomaly that helps investors ride a move after a company reports an earnings surprise.
Right now it looks like an elite group of U.S. cannabis stocks are set to jump higher in the next few weeks and months.
I’m talking about post-earnings announcement drift (PEAD).
Post-earnings announcement drift 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 post-announcement drift.
This phenomenon demonstrates that companies who beat earnings expectations tend to see shares rise in the following weeks and months.
This looks like a good time for cannabis investors to consider riding the drifts.
The U.S. cannabis industry just reported strong quarterly results. The PEAD phenomenon suggests that these shares should be strong for the next few weeks and months.
I have profiled two companies that delivered two of the best earnings reports, and I expect shares to do well in the next few weeks and months.
Curaleaf Holdings (CSE: CURL, OTC: CURLF)
Headquartered in Wakefield, Massachusetts, Curaleaf has a market cap of $2.9 billion. Curaleaf has one of the best portfolios in the cannabis industry, with operations in 17 states, 53 local dispensaries, 15 cultivation sites, and 24 processing sites.
The company made shareholders happy on May 15 when the company reported first-quarter earnings that beat analysts’ expectations. The company reported a net loss of $0.03 per share, better than expectations of $0.05 per share. Revenue fell just shy of expectations but saw a huge jump of 174% from the same period last year.
Curaleaf shares should do well in the next few weeks and months and drift higher.
There is already momentum on Curaleaf’s chart. Shares have rebounded more than 100% from the 52-week low in March. Despite the big rebound, Curaleaf still looks like a deal. Shares are trading 50% below the 52-week high.
Green Thumb Industries (CSE: GTII, OTC: GTBIF)
Headquartered in Chicago, Illinois, Green Thumb has a market cap of $2.2 billion. Green Thumb also owns and operates an impressive portfolio of cannabis assets – it operates in 12 states, owns licenses for 96 retail locations, and operates 13 manufacturing facilities.
The company reported impressive first-quarter results on May 14. Earnings came in at a loss of $0.02, in line with expectations, but revenue surged by 267% from last year to $103 million. Green Thumb is the first cannabis company in the industry to record sales of $100 million in a single quarter.
Green Thumb has also been rebounding on the chart. Shares are up 160% from the 52-week low in March. Despite the big bounce, Green Thumb is still trading more than 50% below the 52-week high.
The Big Picture on PEAD and Cannabis Stocks
The cannabis sector just reported strong quarterly results that showed big gains from last year and, in many cases, beat expectations.
When considering post-earnings announcement drift, companies that beat expectations should see their share prices rise in the next few weeks and months.
Keep an eye on Curaleaf and Green Thumb. These early industry leaders reported two of the best quarters in the industry.
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.