This article was originally published on Fool.com

Amid all the hype about marijuana stocks, the one great equalizer comes when companies have to report their financial results. Tilray (NASDAQ:TLRY) has seen an amazing level of interest since its decision to list on the Nasdaq Stock Market earlier this year, and now, many investors are watching closely to see if the cannabis contender has the ability to live up to its full potential.

Coming into Tuesday’s third-quarter financial report, Tilray investors were looking for solid sales growth even as red ink continues to flow. Tilray wasn’t able to deliver quite the top-line rise that most had expected, and part of the blame might be the reduced prices that the company brought in from its cannabis sales. That’s a trend that shareholders will want to keep an eye on even as the rollout of recreational cannabis in Canada boosts results in the fourth quarter.

IMAGE SOURCE: GETTY IMAGES.

Tilray benefits from the boom in cannabis

Tilray’s third-quarter results were just the latest example of marijuana companies delivering impressive-looking results. Revenue of $10.0 million was higher by 86% from the third quarter of 2017, although it was slightly less than the $10.2 million that most of those following the stock had expected to see. Losses of $18.7 million were also much worse than in the year-ago period, but after allowing for non-cash compensation expenses, adjusted net losses of $0.08 per share were better than the $0.12 per share loss that marked investors’ consensus forecast.

Tilray’s fundamental results showed a mixed performance. On one hand, Tilray did a good job of boosting its production and sales capacity, with total sales volume of 1,613 kilogram-equivalents sold marking a 136% rise from the 684 kilos that the company sold in the third quarter of 2017. The company attributed the gains to increased demand from patients using medical marijuana, as well as bulk sales to other licensed producers of cannabis products and Tilray’s efforts to distribute its product on a wholesale basis for export.

However, pricing pressures had a negative impact on Tilray’s overall sales numbers. The cannabis producer said that its average net selling price fell to $6.21 per gram, down sharply from the $7.53 per gram that it brought in during the year-earlier period. Tilray attributed the reduction to a change in its sales mix, which included more bulk sales than in the same period during 2017.

Tilray also held nothing back when it came to spending money to try to build market share. Sales and marketing expenses were up by nearly 150% from year-earlier levels, and overhead costs rose by about the same percentage. In addition, Tilray’s stock-based compensation expenses jumped to $11.2 million, up from just $35,000 and showing the way that employees of the company are sharing in the stock’s success. With Tilray in an all-out competitive effort to position itself well for Canada’s recreational cannabis rollout, investors fully expected the company to take the opportunity to try to grab market share.

Can Tilray keep gaining ground?

CEO Brendan Kennedy tried to keep investors focused on the long run. “We are in the early stages of achieving our growth potential,” Kennedy said, “and our team continues to strategically execute on disciplined operational initiatives and investments to support Tilray’s long-term, sustainable growth as the pace of legalization continues to accelerate around the world.” The CEO reiterated the company’s commitment to serve both the medical and recreational cannabis markets both in Canada and globally.

With respect to the Canadian rollout, Tilray’s comments were minimal. The company managed to secure cannabis supply agreements with eight Canadian provinces and territories, including the key areas of Ontario, Quebec, and British Columbia, along with Manitoba, Nova Scotia, Yukon, Northwest Territories, and Prince Edward Island.

Instead, Tilray seems more focused on global opportunities. The cannabis company highlighted its acquisition of Alef Biotechnology to allow exports to Chile, with the intent of distributing products around Latin America. Wins in Germany, the U.S., and Australia also showed the benefits of Tilray’s attempts to become a worldwide player in the marijuana industry.

Tilray investors didn’t see the results as being particularly inspiring, and the stock dropped between 1% and 2% in after-hours trading following the announcement. Those following the marijuana industry will have to watch closely to see how well Tilray does in capturing new cannabis users in Canada during the fourth quarter, but they’ll also want to keep an eye on the company’s bigger plans to create a global marijuana empire.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This week has been a big one for the marijuana industry, as some of the biggest companies in the budding sector have given their latest reports about their financial condition. Many investors have looked to Canopy Growth (NYSE:CGC) as the bellwether in the cannabis space, especially given the huge commitment that beer and spirits giant Constellation Brands has made to the company.

Coming into Wednesday’s fiscal second-quarter financial report, Canopy investors expected that the company would be able to keep up with its cannabis-producing rivals. Some of Canopy’s numbers disappointed its shareholders, but the company put itself in position during the past few months to meet its supply commitments as October’s legalization of recreational cannabis in Canada loomed. That will prove far more important to the long-term success of the company, even if investors can’t get past the immediate letdown of seeing financial metrics fall short of their hopes.

Canopy’s revenue rise falls short

Canopy Growth’s fiscal second-quarter results were in line with what the company had expected, even if they weren’t entirely satisfying to others. Revenue of 23.3 million Canadian dollars was higher by 33% from year-ago levels, but that was well below the near-tripling that some of those following the stock were expecting to see on the top line. Canopy reported a loss of CA$330.6 million, working out to CA$1.52 per share, which was far worse than the consensus forecast among investors for CA$0.08 per share in red ink.

Canopy’s financial performance was a natural result of its overall strategy. The cannabis company made only small test shipments of products into recreational channels during the quarter, ensuring that supply chain logistics would work correctly going into mid-October’s Canadian launch but avoiding larger pre-sales. That should make the current quarter’s performance look even more impressive, showing the true growth from the rollout.

Fundamentally, Canopy’s numbers were mixed. The company reported a 34% rise in active registered patients using medical marijuana, hitting 84,400 for the period. Sales volume of cannabis rose only slightly, with a 9% gain to 2,197 kilogram equivalents. However, Canopy stocked up in advance for the Canadian rollout, harvesting 15,127 kilos of cannabis, up 265% from last year’s 4,167 kilos during the same quarter.

One really bright spot for Canopy was its ability to maintain good pricing power in a tough industry environment. Even as rivals like Tilray and Cronos Group dealt with lower average sales prices, Canopy reported a 24% rise in its selling price to CA$9.87 per gram. The reason for the success was that the company made more sales to the German market, where pricing is more favorable, and also did a better job of selling its Softgel capsules. More than a third of Canopy’s revenue during the quarter came from cannabis-derived oils, and their value-added features are beneficial both for customers and for the company.

Co-CEO Bruce Linton kept investors focused clearly on what’s happening right now. “Our entrance into the retail cannabis market has been a success,” Linton said, “with our SKU assortment obtaining over 30% listings market share in multi-store physical retail store networks nationwide.” He pointed to ample inventory levels and strong market conditions that should put Canopy in position to build and sustain a leadership role in the Canadian recreational cannabis market.

What’s ahead for Canopy?

Canopy’s role in Canada will be critical, with the company having supply commitments of 70,000 kilos to provinces across the country, excluding Ontario. Supply shortages plagued the market early on, but average shipment volume has doubled during the first part of November compared to the last half of October. Retail locations in its Tweed and newly acquired Tokyo Smoke store concepts are just the beginning of a big growth campaign to add 20 new stores in the next year. Not all provinces allow proprietary store networks, but those that do are a big opportunity for Canopy to differentiate itself from its rivals.

Efforts to expand production continue to make headway. New facilities are coming on line incrementally, and Softgel production in particular has jumped tenfold since last year. Internationally, Canopy has completed its first U.S. shipment under approval by the U.S. Drug Enforcement Administration, and efforts in Latin America and the Caribbean, Australia, and Europe all point toward an expanded role for the cannabis company as markets develop worldwide.

Canopy wasn’t shy about its profligate spending. Sales and marketing costs jumped more than fivefold from year-earlier levels, and overhead costs more than quadrupled. However, Canopy believes that strong brand recognition will be the key driver of market share, and spending now should reward shareholders in the long run.

Canopy investors didn’t immediately agree, and the stock dropped more than 9% in pre-market trading following the announcement. Yet despite results that fell short of expectations on their face, the strategy that Canopy Growth is following shows a long-term focus that will put the marijuana company in the best position to capture opportunities far into the future.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool US recommends Constellation Brands. The Motley Fool has a disclosure policy.

Millions of investors have looked at marijuana stocks lately, in part because of their big gains and in part because of the rising popularity of cannabis. With many U.S. states and the entire nation of Canada now allowing recreational use of marijuana, the companies that are looking to grow, distribute, and sell the cannabis that consumers want look like prime candidates for investment money.

Yet even though ordinary investors have jumped into the cannabis industry, large institutional investors have taken a somewhat more measured approach. That’s why it’s surprising to see some of the biggest interest in cannabis stocks over the past few months come from well-known stalwarts of the money-management industry. In particular, a recent transaction from mutual fund and ETF giant Vanguard Group points to just how much marijuana investing is moving into the mainstream.

IMAGE SOURCE: GETTY IMAGES.

Which cannabis stocks is Vanguard buying?

It’s not always easy to tell exactly what institutional investors are doing with their money, because their reporting requirements don’t always include up-to-date information. For instance, Vanguard Group is required to file a Form 13F disclosure with the U.S. Securities and Exchange Commission that discloses certain holdings, but it’s only required quarterly, and companies have 45 days to get the filing to the SEC. As a result, as of this writing, Vanguard Group hasn’t yet released its 13F filing for the third quarter.

However, there is evidence that Vanguard has been bulking up its cannabis stock holdings. The clearest evidence was the June 30 13F filing, in which Vanguard revealed an overall position of more than 4.1 million shares of Canopy Growth stock. That represented a roughly 2% ownership stake in Canopy at the time.

Since then, you can find that Vanguard has picked up a variety of cannabis stocks. Just looking at the most recent holdings of the Developed Markets Index Fund as of Sept. 30 shows the following:

• Roughly 4.28 million shares of Aurora Cannabis, with a reported value of $41 million at the time.
• About 1.14 million shares of Aphria, worth almost $16 million.
• The fund’s shares of Vanguard’s total Canopy Growth holdings amounted to almost 1 million shares, worth $48 million at the time.

Vanguard has joint share classes of its funds that match up with certain ETF offerings, so investors can also get exposure through the Vanguard Developed Markets ETF.

Why is Vanguard buying pot stocks?

It might seem strange that Vanguard Group is buying cannabis stocks like Aphria, Aurora Cannabis, and Canopy Growth. The financial institution has a reputation for fairly conservative investing strategies, and it doesn’t offer any mutual funds or ETFs that are laser-focused on the marijuana industry.

What Vanguard is good at, though, is managing index funds that track key benchmarks. That’s the reason cannabis stocks have come into its portfolio, because the S&P/TSX Composite Index, which is the primary benchmark for Canadian stock market investors, chose to include the three cannabis stocks within its index. Canopy Growth joined the index in March 2017, while Aphria entered the index in December, and Aurora Cannabis became a constituent this past March.

Once cannabis stocks became part of a benchmark that the fund company tracks, Vanguard had little choice but to start buying shares. Otherwise, it would have potentially failed to match the performance of the index — especially if the three cannabis stocks outperformed to such an extent that they materially affected the overall returns of the S&P/TSX Composite.

Are more buys on the way?

It’s likely that a rising number of cannabis stocks will become part of major market benchmark indexes like the S&P/TSX Composite, and as that happens, major financial institutions like Vanguard Group will make sure to get their piece of the action. The lesson for marijuana investors is that as the cannabis stocks that they own grow their businesses, the possibility of being added to much-followed benchmark indexes could lead to institutional buying that, in turn, could lead to better returns in the long run.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool US has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Marijuana stocks have captured the imagination of high-growth investors, who hope that major companies in the industry will be able to take early command of the budding cannabis market and become household names across the globe. Among the top companies in the field, Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB) have emerged as true contenders with their early-mover status, and with the backing of Constellation Brands, Canopy seems like a natural favorite to become the real leader of the marijuana market.

Canopy Growth expects to release its fiscal second-quarter financial report on Wednesday, Nov. 14, and investors will be looking closely at the company to see whether it can keep up the pace in a fast-growing market. Indeed, with Aurora Cannabis having reported sales for the September quarter that were higher than what Canopy brought in three months early, Canopy is in a position in which it’s having to play catch-up — at least temporarily — to stay ahead of Aurora Cannabis from a revenue standpoint.

IMAGE SOURCE: CANOPY GROWTH.

Stats on Canopy Growth’s fiscal second-quarter earnings

DATA SOURCE: S&P GLOBAL MARKET INTELLIGENCE.

A big boom for Canopy Growth?

Canopy Growth investors are looking for an extremely strong performance from the cannabis producer for the third quarter. Revenue is expected nearly to triple, and although Canopy isn’t likely to become profitable as long as it has so much growth potential in which to invest any available financial resources, its bottom line is seen showing considerable improvement even compared to just three months ago as sales ramp up.

That level of sales growth is important from a competitive standpoint, because peers in the industry have also seen big leaps in revenue. For instance, Aurora Cannabis said Monday that its fiscal first-quarter revenue jumped 260% to 29.7 million Canadian dollars, with cannabis-related revenue climbing at a 236% pace year over year. Operationally, Aurora managed to see dramatic improvements in key metrics, including production volume that almost quintupled, sales volume by weight that tripled, and active registered patient counts that were up 250% from year-earlier levels.

Seeking to be the industry leader

Yet Canopy Growth has already demonstrated a solid track record of delivering big results. In its fiscal first-quarter report three months ago, Canopy reported a 63% rise in revenue, with strength in several essential measures of success. Selling prices per gram improved by nearly CA$1 to CA$8.94, and the company boasted more than 85,000 patients in the medical cannabis sector. The company’s key Spectrum Cannabis soft-gel product continued to gain traction, with an operational network spanning 11 companies.

Canopy is pursuing growth in several directions. The company’s wholly owned subsidiary Canopy Health Innovations is looking at clinical trials of cannabis for treating insomnia, and it expects further research to continue. The Canopy Animal Health unit will do similar work for potential veterinary treatments.

The most important thing for Canopy to concentrate on right now, however, is the opportunity to serve the new recreational cannabis market in Canada. In preparation for the mid-October legalization of marijuana, Canopy had already sought to maximize the amount of cannabis it would deliver to provincial and territorial governments for the post-legalization rollout, and co-CEO Bruce Linton noted back in August that it had already secured commitments to provide an estimated 36% of total supply, giving it “by far the deepest channel into the Canadian recreational cannabis market.”

What to watch for

Indeed, Linton sees the company as the key innovator in the marijuana space in Canada for the foreseeable future. As the co-CEO put it:

To drive our brand down to main street Canada and capture retail margin, we successfully invested in securing Tweed cannabis store licenses in Newfoundland and Labrador, Manitoba, and Saskatchewan, and we expect to leverage these successes in Alberta as well as in the anticipated private retail framework in Ontario. Canopy is developing the leading private cannabis retail channel in Canada.

Of course, those numbers won’t even show up in Canopy’s fiscal second-quarter results, because the quarter ended on Sept. 30 prior to the rollout of Canadian recreational marijuana. What will appear, though, is a full reckoning of all the supply agreements Canopy was able to secure, along with an early picture of how post-legalization sales have gone. Those numbers should go a long way toward telling whether the company is making the most of its opportunities.

Don’t stop looking at Canopy Growth

With a flood of marijuana earnings reports coming out this week, there’ll be a lot of competition for your attention. But with such a strong track record so far, Canopy Growth is a marijuana stock that deserves a close look, not just for its own sake but also as an indicator of how the entire cannabis industry is performing.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool US recommends Constellation Brands. The Motley Fool has a disclosure policy.

Investors have jumped into the marijuana market aggressively, banking on the rising demand as more jurisdictions legalize cannabis to drive sales across the industry. Among the top stocks in the industry, Tilray (NASDAQ:TLRY) has gotten a lot of attention from its initial public offering on the Nasdaq Stock Market earlier this year and its subsequent surge amid excitement for the legalization of recreational marijuana in Canada.

Tilray expects to release its third-quarter financial report on Nov. 13, and investors have high hopes that the newly public company can live up to all the hype. Yet rather than focusing too much on current results, you should concentrate on what Tilray says about its immediate future. The company will give some good information on Tuesday, but here’s an early look at what you can expect from its quarterly report.

IMAGE SOURCE: TILRAY.

Stats on Tilray’s third-quarter earnings

SOURCE: YAHOO! FINANCE, S&P GLOBAL MARKET INTELLIGENCE.

What investors want to see

Those following Tilray have had mixed views about the medical marijuana specialist’s likely future earnings. They’ve become more optimistic about Tilray cutting its losses in the third quarter and for the rest of 2018, but they’ve widened their loss projections for 2019. The stock has been extremely volatile since the company made its first earnings report as a public company three months ago — it has more than doubled since late August but has been up to a much greater extent before the past month’s slide.

Tilray’s second-quarter financial report in August produced a lot of excitement shortly following the company’s IPO. Sales climbed by almost 25% from three months earlier to $9.74 million, roughly doubling year over year. As is typical for small upstart companies, Tilray saw losses widen considerably as it sought to ramp up its production. Thanks to the IPO, Tilray dramatically improved its cash on hand in a way that didn’t show up in the June 30 numbers, but investors focused most of their attention on how the company would take advantage of opportunities to supply the Canadian market. In addition, efforts to build up international sales got a lot of attention, with nearly a dozen countries on the list of markets that Tilray served.

CEO Brendan Kennedy summed up his view of the company’s performance and outlook. “We are very pleased with our strong start to 2018,” Kennedy said, “[and] Tilray is well positioned to continue to pioneer the development of the global medical cannabis market and to become a leader in the adult-use cannabis market in Canada.” The CEO pointed to Tilray’s global strategy, distribution network, and research commitment as playing pivotal roles in the company’s long-term success.

The big question for Tilray

As useful as it’ll be to see how much growth it was able to produce in the third quarter, many investors won’t really be satisfied by whatever the company says about that period. That’s because Canadian legalization only happened in October, after the end of the third quarter. As a result, firm numbers about how the rollout went won’t show up until Tilray releases fourth-quarter financials early next year.

However, it’s likely that the company will give some information about the early stages of the introduction of recreational cannabis in Canada. That could ignite a new surge in excitement about Tilray, despite the fact that it has an extremely high valuation that many believe is unwarranted by its fundamental business prospects.

Even if early sales are encouraging, Tilray also has to boost its production capacity. Other industry players like Canopy Growth have already spent aggressively to build growing facilities that will give them a greater ability to supply the market, as well as to offer higher-margin cannabis-derived products to maximize profit. Investors will have to pay close attention to ensure that development projects are on track and will kick in fast enough to avoid losing market share to nimbler competitors.

Big moves for Tilray stock aren’t ending soon

Earnings results often give rise to big stock price moves, and Tilray has already been among the most volatile marijuana stocks. With all eyes on the medical cannabis company, it will have to work hard in order to satisfy investors that its prospects warrant the stock’s current valuation. Otherwise, the disappointment could prove problematic for shareholders after the report.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool US has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The cannabis stock revolution has continued to inspire investors to look closely at the marijuana space, and despite recent volatility, many of those who follow the industry continue to seek smart investments with exposure to cannabis. Cronos Group (NASDAQ:CRON) was one of the first marijuana stocks to trade on a major U.S. exchange, but it also has a chip on its shoulder because of the larger scope of some of its biggest rivals in the Canadian cannabis space.

Cronos expects to release its third-quarter financial report on Nov. 13, and investors are already expecting that the marijuana company will dramatically grow from year-ago levels. Yet the bigger question is whether it will grow fast enough to catch up with some of its major competition. You can expect answers on Tuesday, but here’s an early look at what you should be ready to see from Cronos in its quarterly report.

PEACE NATURALS FACILITY. IMAGE SOURCE: CRONOS GROUP.

Stats on Cronos Group’s third-quarter earnings

SOURCE: S&P GLOBAL MARKET INTELLIGENCE. EPS = EARNINGS PER SHARE.

Ramping up

Cronos has done a good job over the past year of ramping up its revenue. The fastest growth came in the first quarter of 2018, when sales soared more than 80% compared to the fourth quarter of 2017. Yet by contrast, expectations for the third quarter are relatively modest, with anticipated sales representing a troublingly slow 5% growth rate.

Cronos Group’s second-quarter financial report back in August drummed up considerable optimism about the cannabis company’s future. Not only has Cronos built up sales but it’s also focused on the best niches of the cannabis market, including sales of cannabis oils that tend to get much higher profit-margin levels than dried cannabis. The company also took steps to prepare for its future, including raising cash, announcing plans to build a new production facility in the Canadian province of Ontario, and forging relationships overseas that could greatly expand Cronos’ international business.

CEO Mike Gorenstein laid out Cronos Group’s strategy in very simple terms. As Gorenstein put it, Cronos is focused on four strategic priorities: building capacity in a capital-efficient manner, creating a smart distribution infrastructure, establishing valuable intellectual property to differentiate itself from commodity players in the cannabis industry, and promoting brands that will resonate with customers and produce loyalty in the long run. The CEO is convinced that, regardless of how many analysts are paying attention to supply agreements in determining market share, the real test will be for Cronos to offer high-quality products that allow the company to interact favorably with its customer base.

What to really look at

The biggest challenge for investors looking at Cronos Group’s third-quarter results is that they won’t include the most important event for the company: the legalization of recreational cannabis sales in the Canadian market. Those numbers won’t show up until Cronos releases fourth-quarter results early next year and they’re likely to be huge. Currently, expectations are for revenue to approach the CA$10 million mark in the fourth quarter, almost tripling since mid-2018.

Therefore, the most important things for shareholders to concentrate on when Cronos releases its latest results are the comments that management makes about the early going in the fourth quarter. If the rollout of cannabis in Canada has gone well, then it should lead to optimistic comments in the conference call from Cronos executives. Anything less than perfect candor could indicate a more sluggish start to Canadian cannabis sales than investors would like.

Also, the September announcement that Cronos will work with Ginkgo Bioworks to produce cultured cannabinoids has huge implications for the company’s future. Extracting cannabis oils is costly and time-consuming, but Cronos hopes that working with Ginkgo could lead to development of a more cost-effective production method that will give it a competitive advantage. The partnership came at a cost, as Ginkgo will be eligible to receive Cronos stock upon meeting certain milestones.

Finally, investors have hoped that Cronos would be able to attract a major consumer-products company as a partner in the same way that marijuana rival Canopy Growth did. So far, no suitors have come up, and that has many investors concerned that Cronos stock might be trading at unsustainable levels based solely on its current business fundamentals.

Expect stock turbulence to continue

Cronos shares have been all over the map, more than doubling from mid-August to mid-September, only to give up most of those gains by the end of October before rebounding. It’s hard to tie stock prices to business performance in a rapidly growing industry, but smart investors will want to look closely at everything going on in Cronos Group’s financials before committing their hard-earned money to the cannabis company. Only with great execution will Cronos be able to catch up with some of its larger rivals in the marijuana industry.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool US has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Investors in cannabis stocks have learned the hard way that volatility can cut both ways. Even as investor interest in the marijuana industry soared during the late summer and early fall, share prices of cannabis companies hit the skids in recent weeks as the reality of what will inevitably be a long ramp up in production and sales activity hit home for shareholders.

Yet those who seek out the highest-growth opportunities in the investing universe are always looking forward to the next big catalyst for further growth. For the marijuana industry, that’s set to come in the form of quarterly reports for the rising number of publicly traded stocks that have connections to cannabis. Many of the biggest players in the space will issue their reports over the next week, and that should both refresh investors’ memories about the huge growth potential of cannabis and confirm whether marijuana companies are living up to their full potential.

IMAGE SOURCE: GETTY IMAGES.

What to expect from cannabis companies in the next week

Here’s a brief look at some of the major companies in the marijuana industry that are expected to report their latest earnings results in the near future:

• Canopy Growth (NYSE:CGC) reported a 63% year-over-year rise in revenue last quarter, bringing in $25.9 million Canadian dollars over the three-month period. Investors are hoping to see even more dramatic gains when it reports on Nov. 14, with current third-quarter sales projections for CA$75.3 million, which stem, in part, from the recent acquisitions Canopy has made.
• Tilray (NASDAQ:TLRY) saw even bigger growth rates when it issued its first quarterly results as a publicly traded company three months ago, seeing revenue nearly double to $9.74 million from year-earlier levels. Most investors are looking for only modest further gains, to $10.25 million in sales for the just-ended third quarter, but that would still likely be a big increase from what Tilray sold in the third quarter of 2017. Tilray’s expected to release its results on Nov. 13.
• Aurora Cannabis (NYSE:ACB) more than tripled its revenue in the third quarter of 2018, to CA$19.1 million, and most investors see those favorable trends continuing. Thanks to its acquisition of MedReLeaf, Aurora could see revenue of CA$39.5 million in its Nov. 14 report, and that figure would be almost five times higher than its year-ago sales.
• Cronos Group (NASDAQ:CRON) has been playing catch-up on a revenue basis, and it’ll have to keep working hard to do so for the foreseeable future. Sales of CA$3.39 million in the second quarter multiplied more than fivefold from year-earlier results, but projections for CA$3.56 million on the top line for the third quarter won’t give investors much in the way of sequential growth to hang their hats on when Cronos reports on Nov. 13.

It’s also important to keep in mind that investors are expecting none of these marijuana companies to be profitable during the period. That’s understandable, in part because the companies are just now ramping up their business models, and in part because the expenses of establishing themselves as key players in the cannabis industry have been extensive.

Much ado about nothing (yet)

Marijuana investors should look closely at these companies’ quarterly reports when they come out, but they shouldn’t focus on typical headline numbers like sales and net income. The reason is simple: The big impact that investors hope will send sales skyrocketing — the legalization of recreational cannabis in Canada — didn’t happen until mid-October. That means shareholders will have to wait until February before getting firm reads on how things are going in the Great White North.

However, what investors can expect now is commentary from company executives about early results, with anecdotal and some limited financial information about how the beginning of the fourth quarter is going. Already, there have been reports of limited supplies of cannabis in Canada, suggesting that the rollout hasn’t gone as smoothly as some had hoped. It could take a while for the new distribution process to work out the kinks.

The good news for investors, though, is that the experience in Canada should serve to provide valuable knowledge if cannabis companies get a chance for an even bigger rollout elsewhere in the future. Most marijuana investors are still focusing squarely on the huge potential of the U.S. market in the event of a federal legalization effort, so looking at how successful cannabis companies are in navigating difficulties in Canada could foreshadow winners and losers in a future U.S. push.

Keep your eyes open

After a tough October, marijuana investors are hoping for news that will restore confidence in the industry. Quarterly financials could provide that catalyst, and those companies that deliver good results could see nice rebounds in the week to come.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool US has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Investor interest in marijuana stocks reached a fever pitch as summer turned to fall, and the Oct. 17 legalization of recreational marijuana in Canada was a milestone event for the budding cannabis industry. Yet in what many market watchers referred to as a sell-the-news event, marijuana stocks retreated in the last half of October, and Canopy Growth (NYSE:CGC) finished the month with losses of 19%.

For those who had hoped that Canopy Growth’s stock would be a straight-up pathway to riches, October’s performance for the cannabis leader brought a cold dose of realism to their dreams. Yet in one way, there’s a silver lining to Canopy’s swoon, as it’ll make sure that key investment partner Constellation Brands (NYSE:STZ) remains dedicated to fostering the cannabis company’s growth and aligns shareholders’ interests with its own.

IMAGE SOURCE: CANOPY GROWTH.

Too far too fast

Constellation Brands has put more money into the marijuana industry than any other major mainstream company, supplementing a modest $190 million purchase of a 10% stake in the company in late 2017 with a massive investment of nearly $4 billion in August. Canopy investors at the time saw the move as reflecting the huge potential of the cannabis industry, and they were pleased that Constellation recognized its own ability to profit from Canopy’s growth. The marijuana company’s stock immediately roared higher, pushing out of the $20s to rise as high as the mid-$50s on several occasions in September and October.

However, the potential problem for new investors looking at paying those high prices for Canopy stock was that the structure of the Constellation investment created a potential conflict. In addition to paying 48.60 Canadian dollars per share for Canopy stock in August — roughly $37 per share in U.S. dollars — Constellation also got warrants to purchase additional shares of the marijuana company’s stock in the future. For the bulk of the warrants, Constellation got the right to pay CA$50.40 per share — or about US$38.50 — for up to 88.5 million additional shares of Canopy.

What that meant for investors was that as Canopy’s share price was soaring, the potential for future dilution was increasing. With the stock in the mid-$50s, would-be buyers had to deal with the prospect that Constellation would be able to pay roughly $16.50 per share less to take what would amount to a controlling stake in Canopy. And even though some of Constellation’s warrants were set to reflect the market price of the stock at the time it wanted to exercise them, the amount of dilution from the majority of Constellation’s warrants was an impediment.

A better place

Now, though, Canopy’s stock price aligns the interests of new shareholders with Constellation’s interests. At roughly $36.50 per share currently, Canopy’s stock price is low enough that it wouldn’t make sense for Constellation to exercise most of its warrants. Although that doesn’t eliminate the threat of potential future dilution, it does put those looking at Canopy stock for the first time on a more even footing with existing shareholders, including the beer giant.

Moreover, none of the decline in Canopy’s stock really came from any significant change in the company’s fundamental prospects. Canopy still has a commanding lead in cannabis production capacity, and it’s moving forward with plans to boost its output even further. The strength of the Tweed brand remains important for its long-term efforts to build market share, and exposure to international markets will make it easier for Canopy to take advantage of the trend toward legalization globally. As the market for cannabinoid-containing beverages keeps developing, opportunities for Constellation and Canopy to work together will likely broaden.

A price to keep in mind

Investors shouldn’t necessarily anchor on the exercise price of Constellation’s warrants as a firm line in the sand. The value of the warrants doesn’t go to zero just because the stock falls below the exercise price, as the three-year time span on the warrants gives Constellation the ability to profit from share-price gains even without directly owning shares.

However, for those looking at Canopy Growth stock for the first time, the fact that prices have fallen back to levels that Constellation contemplated as offering a reasonable opportunity for future investment is encouraging. Marijuana stock volatility isn’t likely to go away anytime soon, but smart investors interested in the space can take advantage of downward moves when they come to take a closer look at stocks like Canopy Growth.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool US recommends Constellation Brands. The Motley Fool has a disclosure policy.

Tobacco giant Altria Group (NYSE:MO) has led its industry for decades, finding ways to keep profits rising even as cigarette smoking has become less popular. With interest in tobacco seemingly in a permanent state of decline, some investors think that marijuana would be a better market for Altria to pursue.

Coming into the company’s third-quarter financial report last week, Altria investors were hoping that the tobacco giant would still be able to deliver earnings growth despite the long-term trends among smokers. Altria succeeded on that front, but it remained relatively quiet about its plans for the cannabis market, instead taking steps to address more immediate concerns about e-cigarettes.

IMAGE SOURCE: ALTRIA.

How Altria did

Altria’s third-quarter results marked a good rebound from a poor showing three months ago. Revenue net of excise tax climbed 3.3% to $5.29 billion, which was about $85 million more than most of those following the stock had expected to see. Net income was up 4% to $1.94 billion, and the resulting adjusted earnings of $1.08 per share came in just above the consensus forecast among investors for $1.07 per share on the bottom line.

From a segment perspective, Altria’s results were reasonably solid across the board. Revenue from the key smokeable products segment, which includes the Marlboro cigarette division, rose 2.7% from year-earlier levels. That came despite substantial declines in cigarette shipment volumes, which were down 3.7% from the third quarter of 2017. That combination left the unit’s operating company income roughly unchanged over the period, and margin levels were down due to higher costs that were offset by higher selling prices. Market share overall fell half a percentage point to 50.1%.

Altria’s smokeless products division did better. Revenue net of excise tax jumped more than 7%, and adjusted operating company income rose by the same 7% figure, as higher pricing was more than enough to overcome rising expenses. Shipment volume inched higher by 0.4%, and once again, the key Copenhagen brand led the way for the segment.

Altria’s wine business was weaker. Revenue was mostly flat, and operating company income fell nearly 20% despite a 2.4% rise in wine shipment volume. Higher costs included some one-time employee bonuses that represented a substantial amount of the small division’s overall profit.

What’s ahead for Altria?

CEO Howard Willard was enthusiastic about the company’s performance. “Altria delivered excellent third-quarter adjusted diluted earnings-per-share growth of 20%,” Willard said, “and continued to return large amounts of cash to our shareholders.” The CEO noted that Altria’s tobacco business is solid, and the company is “making strategic investments to drive long-term success.” Those sentiments led Altria to boost its guidance very slightly, lifting the bottom end of its projected earnings range by $0.01 to set a new range of $3.95 to $4.03 per share.

Yet on the marijuana front, Altria didn’t say much. Willard’s comments were limited to the following:

We are exploring opportunities in the category, and we acknowledge that it is currently federally illegal in the U.S., but we think it’s worth exploring the category because that might change in the future. I’ll hold back on explaining in more detail kind of how we view the category, because we’re relatively early in our exploration.

Instead, Altria discussed plans to respond to the U.S. Food and Drug Administration’s concerns about electronic cigarettes. Altria’s Nu Mark subsidiary will remove the pod-based Elite and Apex products until the FDA issues a market order. For remaining products under the MarkTen and Green Smoke brands, Nu Mark will keep selling tobacco, menthol, and mint varieties, but discontinue all other flavors until it gets FDA approval or it can address concerns about youth use of the products. The move will put pressure on Altria’s competitors, especially those for which e-cigarettes make up their primary business.

Altria shareholders were generally pleased with the report, sending the stock up between 1% and 2% after its release. Although marijuana investors will have to wait a while longer to find out the tobacco giant’s cannabis plans, solid financial performance shows that Altria is doing a good job of keeping pace with its historical track record despite ever-present headwinds.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Investors are flooding into cannabis stocks, and plenty of companies that hardly anyone had ever heard of just a year ago have now become some of the best-known names in the marijuana space. Canada’s legalization of recreational marijuana has pulled stocks that operate north of the 49th parallel into the spotlight, and Canopy Growth (NYSE:CGC) has become one of the early-moving leaders of this budding industry.

Many think that Canopy Growth’s best days might well be behind it. After all, the stock has already seen shares jump more than 20-fold on the Toronto Stock Exchange since mid-2016, and it’s posted impressive gains in the few months that it’s traded on the New York Stock Exchange as well. But thanks in large part to a nearly $4 billion investment from Corona beer maker Constellation Brands (NYSE:STZ) as well as its own strategic vision for marijuana dominance, the future for Canopy Growth still looks bright.

IMAGE SOURCE: CANOPY GROWTH.

What Canopy can do on its own

Even before Constellation upped the ante by boosting its stake in the marijuana grower, Canopy had a number of things going for it that gave it a competitive advantage over most players in the industry. Canopy already has huge production capacity, having reported about 2.4 million square feet of licensed growing space for cannabis as of mid-2018. Moreover, the company is investing heavily in boosting production, with new greenhouses in key areas like British Columbia potentially more than doubling its square footage to a goal of 5.7 million square feet. Once fully online, that could bring Canopy’s dried cannabis production capacity into a range of roughly 450,000 to 500,000 kilograms, and that would leave it as either the industry leader or a close second based on current planned investments elsewhere in the sector.

Moreover, unlike many cannabis companies, Canopy was smart early on in recognizing the value of diversifying its geographical scope. Rather than simply building distribution networks in Canada, Canopy already has a presence in several foreign markets, and the ability to export cannabis gives the company the ability to avoid price challenges in its home market to find the best profit opportunities worldwide.

Canopy has also seen the importance of building a brand. The company’s Tweed line of products goes well beyond dried marijuana leaf to encompass growth areas like softgel capsules for cannabis-derived oils. And even under Canada’s plain-packaging laws, Tweed has the ability to develop a loyal customer base that will give Canopy the ability to market value-added products with higher margin levels than plain dried cannabis.

Canopy and Constellation

Yet the biggest vote of confidence in Canopy Growth has come from Constellation Brands. The alcohol specialist has made multiple investments in Canopy, starting with a nearly 10% stake a year ago for $190 million and then doubling down with its $3.8 billion deal this past August. Under the terms of the deal, Constellation not only boosted its interest in Canopy to 38%, it also gave itself the option to boost its stake in Canopy if it chooses to exercise its rights on warrants and convertible debt to accept additional shares of the marijuana producer.

The opportunities for Canopy and Constellation to collaborate have huge potential. A number of companies are already exploring the potential for beverages that incorporate various cannabis-derived oils, emphasizing both the positive health impacts of certain types of oils and the popularity of cannabis in general. Just as energy drinks reinvigorated a flagging market for traditional sugary carbonated soft drinks, so too could marijuana-containing beverages bring new interest to the industry.

Constellation also likely sees the collaboration as a defensive measure. Some cannabis advocates have played up the advantages of marijuana over alcohol. If consumers substitute cannabis for beer and spirits, then it’s useful for Constellation to have exposure to both industries — while still potentially leaving Canopy stock available for investors who want purer exposure to the cannabis sector.

A play on innovation

Finally, Canopy understands that it needs to foster innovation in order to stay ahead of the game. That’s a big part of why it funded the Canopy Rivers investment vehicle, and already, it’s found some lucrative investments that could pay off for Canopy Growth in the future.

Canopy Growth has already seen impressive gains for early shareholders, and it’s reasonable for investors to highlight both risks and potential rewards from investing in the stock. Yet from a fundamental business perspective, the best days for Canopy Growth lie squarely in front of it.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool US recommends Constellation Brands. The Motley Fool has a disclosure policy.