Legalized Marijuana Stocks, Who’s Poised to Hash It Out? A Profitability Analysis of NYSE & NASDAQ Listed Market Leaders

Abstract

Industry analysts expect spending on legal cannabis usage worldwide to reach $57 billion by 2027 and the North American market segment to climb from $9.2 billion in 2017 to $47.3 billion a decade later (Forbes 2018). Currently, NYSE & NASDAQ stock exchanges only trade eleven marijuana related companies. As cannabis usage increases in popularity, many investors seek to evaluate the merits of marijuana stocks. Our research analyzes 3-year trends of the ten publicly traded cannabis companies in the food, beverage and pharmaceutical industries by comparing the profit margins of each as well as their respective GIC sub-group averages. We specifically examine return on equity (ROE) and apply DuPont Analysis to disaggregate ROE into return on assets (ROA) and financial leverage (FL). An inspection of these elements yields a clear understanding of profit margin and asset turnover to further explain what makes a successful pot based business. Our preliminary results show Aphria, Inc., (APHA) as the leader in profitability when compared to its competitors. Aphria rises to the top as the only company that maintained a positive profit margin from 2016 to 2018 as well as a positive ROE. Aphria’s profit margin increased significantly from 4.72% in 2016 to 20.54% in 2017 and then soared to 79.77% in 2018. Influenced more by profit margin than financial leverage, which remained fairly steady at 1.05 in 2016, 1.14 in 2017 and 1.13 in 2018, Aphria’s ROE and ROA increased all three years.