Every spring, the drama and excitement of horse racing’s Triple Crown draws the interest of even the most casual sports fan.
The pageantry, stories, and sheer speed of this events is so captivating that the kick-off event, the Kentucky Derby, has earned the nickname “The most exciting two minutes in sports.”
To win the three consecutive races of the Triple Crown – spaced only two weeks apart from each other – against the best competition that the world has to offer is one of the most difficult and prestigious accomplishments in all the sporting world.
In fact, since 1875 (the first year all three races were run), only 13 horses have ever won the Triple Crown.
But perhaps my favorite piece of Triple Crown trivia is the name of the very first horse to ever win all three races…
Sir Barton. That has a certain ring to it…
If you look back at the betting odds of the last three Triple Crown winners, you would see that the chances of winning the subsequent races improves dramatically after having won the first leg, the Kentucky Derby.
Each horse saw their odds of winning the next race, the Preakness, improve by at least 30%. Justify, last year’s Triple Crown winner, went from a 22% chance at winning the Kentucky Derby to an almost unheard-of 71% chance to win the Preakness. That increase would prove to be justified (I had to say it), as he would go on to win the race just 2.9 seconds slower than the all-time record held by Secretariat.
And while, unfortunately, we won’t get to see a Triple Crown winner this year, I’ve found another example of prior accomplishments pointing towards future success in pot stocks that could lead to some great profits…
Cannabis Stock Earnings in Pole Position
As cannabis stocks become more mainstream, the ritual of quarterly earnings season will become more of a mainstream event.
Early in the life cycle of pot stocks, social acceptance and legalization issues were the only real consistent movers of the sector.
While legalization issues will still be the primary mover (especially when U.S. federal legalization moves toward the front burner), the maturing industry (though still in its adolescence) will more and more be driven by companies’ ability to grow revenues and generate returns for shareholders.
Mark your calendars for the biggest cannabis event of the year
Four of the five largest cannabis companies have reported earnings already, but the big dog on this porch, Canopy Growth (CGC), doesn’t report until June (they have yet to set a firm date for their earnings report). Let’s see what we can glean from the earnings reports of numbers 2 through 5 that might inform us about what to expect for CGC’s upcoming earnings report…
- Aurora Cannabis Inc. (ACB): The second biggest pot pure play (by market capitalization at $8.867 billion) got a nice bump last week when they announced earnings. Among the good news: revenues were up 20.2% vs. last quarter and a whopping 242% Year-over-Year (YOY). The international sales portion of their sales showed even higher growth, up 38% vs. the previous quarter.
- Cronos Group, Inc. (CRON): The third biggest pot stock ($5.223 billion market cap) showed monstrous 40% revenue growth vs. the previous quarter and 120% YoY growth. The company doesn’t yet break out international sales, but that quarterly sales jump is an eye opener.
- With its stock price cut in half this quarter, Tilray, Inc. (TLRY) has dropped from 2nd to 4th in size among the pot pure play stocks with $4.343 billion in market cap. Their quarterly growth rate was a stunning 48.4% with a YoY growth of 195.1%. However their costs are escalating faster than their competitors, driving their profit margins (the amount of each dollar of goods sold they keep) down versus their competitors. And that’s why their strong revenue growth did not boost the stock price last week.
Canopy Growth (CGC) has given some analysts reason to lower their growth rate targets for when they report next month. The $16.657 billion dollar is nearly twice as big as #2 ACB. Canada-based Scotiabank analysts have cut their estimates for CGC quarterly growth to less than 5%. Granted, CGC revenues jumped 252% last quarter, so it’s easy to deduce that outrageous growth like this can’t continue. And the Scotiabank analysts made this call back in April before the other pot stocks reported their earnings. But based on the strong numbers from the other big pot stock players, I’d be very surprised if the CGC quarterly growth only hits the mid single-digits…
Short-term pot stock price growth will be very dependent on the CGC earnings report. I expect an upside surprise based on a fairly low bar that has been set by analysts. With that expectation, the deflated pot stock prices we’ve seen as a result of the May swoon should be used as a buying opportunity.
Great trading and God bless you,
D.R. Barton, Jr.