Jim Cramer Explains What Needs To Happen For Cannabis Stocks To Bounce Back

Cannabis investors are in the midst of earnings season, which is also a timely opportunity to take a glimpse at the stock performance of some big players within the space.

While Canadian marijuana stocks are struggling to gain momentum, optimism over prospects of U.S. cannabis legalization is evident, Investor's Business Daily' Bill Peters writes.

The U.S. House of Representatives approved the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act, H.R. 3617, in April. The legislation which would remove cannabis from the Federal Controlled Substances Act, allowing states to legalize cannabis, its production and sales free from federal interference, is now waiting for the Senate's review.

On the other side, Sen. Charles Schumer (D-N.Y.) recently reaffirmed the postponement of filing a comprehensive marijuana reform proposal from April to sometime before the August recess. 

A group of 24 senators from both sides of the aisle urged congressional leaders earlier this month to enact marijuana banking provisions into law as part of the large-scale manufacturing bill, the America COMPETES Act. And about a quarter of the House voting members have lined up behind an idea that the bipartisan Secure and Fair Enforcement (SAFE) Banking Act would "help cannabis-related businesses, support innovation, create jobs, and strengthen public safety in our communities."

In addition, Rep. Nancy Mace (R-SC), a Republican congresswoman who championed the States Reform Act — a cannabis reform bill — said in March that she has received assurances there will be a hearing on her proposal, even as a minority member of the chamber.

Canadian cannabis giant Canopy Growth Corp CGC is scheduled to release an earnings report for the fourth quarter of fiscal 2022 on Friday.

CNBC's Jim Cramer said on Friday that Canadian cannabis giant Canopy Growth "needs national legislation promoting the use of marijuana, not just flat out legalization, but subsidies" for its stock to rally to its previous highs.

"If we want the market to stage a meaningful comeback, we need China to reopen, Russia to withdraw from Ukraine, and the [Federal Reserve] to curb-stomp inflation with a 100-basis point rate hike," Cramer continued. "Unfortunately, only one of those three is within America's control."

The company is clawing its way into the U.S. market, further positioning for federal cannabis legalization with the recent acquisition of a California-based producer of high-quality cannabis extracts and pioneer of clean vape technology, Lemurian, Inc., being its latest move.

Currently, the company's shares are trading 6.61% lower at $ 5.16 per share. Year-to-date, the stock has lost roughly 44%.

What about Aurora and Tilray? The stocks of Canopy's industry peers, Aurora Cannabis Inc ACB and Tilray Inc. TLRY also saw a drop year-to-date, by 51% and 38%, respectively.

Aurora reported its third-quarter financials last week, revealing a 17% sequential decrease in net revenue to $50.4 million. Medical cannabis net revenue increased 8% year-over-year to $39.4 million, delivering 78% of Aurora's third-quarter 2022 consolidated revenue and 92% of adjusted gross profit.

Miguel Martin, the company's CEO, said that the "further cost savings will enable us to increase our range of savings under our business transformation plan from $60 to $80 million to $150 to $170 million."

Cantor Fitzgerald's Pablo Zuanic said in his recent note that "the company's top 2 global cannabis exporter status is a reason to keep an eye on the stock, although question marks remain about lack of profitability and cash flows (it raised CA$139 million in new equity in the March quarter, but free cash flow was -$45 million)."

Tilray reported its financial results for the third fiscal quarter last month, touting the continued strength in the international business, with revenue up more than 4,000% from the prior year's quarter and a 37% increase in revenue in EMEA when compared to the previous quarter.

Zuanic said that the international business accounts for 29% of cannabis sales and probably close to half of the gross profits, which was "the main takeaway" from the quarter.

Photo: Courtesy of Nick Chong on Unsplash