The Horizons Marijuana Life Sciences ETF has risen more than 70% over the past year, soaring past the S&P 500 and its 45% gains during that time. The bullishness in the cannabis sector of late is due to the promising marijuana movement in the U.S., where multiple states have passed legislation to permit recreational marijuana, including New York, New Mexico, and Virginia.
Canadian pot stocks are soaring on all this excitement, even though these recent developments don't immediately improve their prospects for expansion into the U.S. Federal legalization is what needs to happen for that to be the case, and that is anything but a guarantee at this point. Should investors holding these stocks be worried about a crash?
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The pot market in Canada is slowing down
Amid the pandemic, the cannabis industry has performed well in Canada. Retail sales in December 2020 reached a peak of 299.7 million Canadian dollars -- nearly double the CA$154.1 million that Statistics Canada reported for January 2020. But in the first month of 2021, sales fell 5.6% from those highs to CA$282.8 million. And while it's tempting to say that is just a one-month decline, some larger cannabis producers in Canada have been struggling to grow their sales of late.
On April 12, Aphria (APHA) released its third-quarter results for fiscal 2021, where it reported that its net sales for the period ending Feb. 28 totaled CA$153.6 million. That was just 6.4% higher than the CA$144.4 million the company reported a year ago, and it was down 4.3% from the previous quarter. Although the company reported its eighth straight quarter of positive adjusted EBITDA, investors primarily invest in cannabis for the growth opportunities, which are lacking in Canada right now.
A day later, OrganiGram reported its second-quarter results, which were even more abysmal. Net revenue of CA$14.6 million up until the end of February was down 37% year over year. The company faced challenges due to COVID-19 and had to shut down its facility in Moncton, New Brunswick, after reporting several positive cases. However, in the previous quarter, OrganiGram didn't fare a whole lot better. Its net sales for the period ending Nov. 30, 2020 totaled CA$19.3 million and were down 23% year over year.
The cannabis industry in Canada is well past its infancy, and it is much more difficult for companies to generate organic growth, especially amid increasing competition. South of the border, however, is a whole different story.
U.S. pot stocks are doing much better
Unlike Canada, where marijuana has been legal since October 2018, new markets are continuing to pop up in the U.S., and that is making it easier for cannabis companies to expand and boost their top lines.
Multistate operator Trulieve Cannabis is coming off an impressive year in 2020, where its revenue of $521.5 million grew 106%. And the company is still expanding into new markets, including Massachusetts, where it has recently obtained approval to begin growing plants at its facility in Holyoke.
Another company, Green Thumb Industries, reported even better numbers, with sales last year coming in at $556.6 million and increasing by more than 157% year over year. And with a presence in both New York and New Jersey, two of the biggest markets to recently legalize marijuana, it too has some exciting growth opportunities ahead.
Research company BDSA projects that in Canada, the pot market will be worth just $6.1 billion by 2025. That pales in comparison to the $34.5 billion that it expects the market in the U.S. to be worth by then.
For growth investors, there is a wide discrepancy between Canadian and U.S. pot stocks right now and over the long term, with the latter holding a significant advantage.
Is a sell-off overdue?
It can be hard to assess the value of a fast-growing pot stock, but looking at its forward price-to-sales ratio can be a helpful way to compare it against its peers. And on that metric, Canadian pot stocks don't compare well against two of the top U.S.-based producers:
TLRY PS Ratio (Forward) data by YCharts
Canopy Growth is the most popular Canadian pot stock, and investors are paying a hefty premium for it. And while Aphria will get larger by merging with Tilray, neither stock is cheap.
With higher valuations, lackluster sales numbers, and more attractive investment opportunities south of the border, it wouldn't be surprising to see Canadian pot stocks give back some of the gains they have amassed over the past 12 months. Aphria has soared around 300%, and even OrganiGram has climbed more than 60% despite some uninspiring performances.
