You can tell a sector is booming by the preponderance of two words: “bought deal”.
A bought deal, a uniquely Canadian practice in which an investment bank buys a guaranteed block of stock from an issuer before canvassing potential buyers, is inherently risky. It means the underwriters have a huge amount of confidence in their ability to place the stock. It simultaneously means the company being sold has the cachet to demand a bank take on that risk, lest they take their business elsewhere.
Marijuana stocks are the story of the 2016 Canadian capital markets, and as a result you are seeing the term “bought deal” around them a lot. In early October, we did a piece detailing the top ten performing Canadian marijuana stocks to date in 2016. Nine of the ten boasted triple-digit gains -and that was before things got really crazy in the world of weed.
Whether you are a momentum investor looking to nail a fast moving target or a value guy who wants to know what’s what when it all shakes out, you’ll want to know which companies have the ultimate margin of safety: cash. We count down the five best capitalized Canadian marijuana stocks. These numbers are based on the most recent figures available and do not include pending financing activities.
1. Aphria (TSX:APH)
Cash and Short Term Investments $53.45-million (as of August 31, 2016)
Aphria, said M Partners analyst Mason Brown in October, is a low-cost producer and an industry leader in the space with plenty of upside. Brown’s thoughts echoed those of Clarus Securities analyst Noel Atkinson, who in April said the Licensed Producer was nothing less than the leader in Canada’s medical marijuana space. After Aphria entered into a $6.5-million deal to acquire 360,000 square feet of production space located on 36 acres of land in Leamington, Ontario, Atkinson said the ascension was complete.
“Aphria is already an industry leader in terms of production cost, profitability, registered clients, and sales volume,” said Atkinson. “This deal ticks the last box – scale of production facilities – to have Aphria now considered truly on equal footing with Canopy as the two top players in the Canadian MMJ sector and we would argue Aphria is more attractive than Canopy due to its much higher profitability.”
Not one to rest on its laurels, Aphria recently entered into a $35-million bought deal.
2. Canopy Growth Corp (TSX:CGC)
Cash and Short Term Investments (As of September 30, 2016) $45.38-million
With a stock that has absolutely soared since the middle of this year, Canopy Growth has become one of the household names of the Canadian marijuana markets. Earlier this month, Canopy became Canada’s first billion dollar marijuana stock. The milestone came just two-and-a-half years after it began to trade publicly as Tweed Marijuana. PI analyst Jason Zandberg says Canopy’s 350,000 square-foot greenhouse facility, at the site of a former Hershey’s chocolate plant in Smiths Falls, Ontario, has the potential for low-cost production. The analyst recently raised his one-year price target on Canopy from $7.00 to $12.00 after the company’s most recent quarterly results met his “aggressive” expectations.
3. Mettrum Health (TSX:MT)
Cash and Short Term Investments: $12.06-million (As of June 30, 2016)
Despite a quarter that he felt showed “mixed” results, Mackie Research Capital analyst Neal Gilmer recently raised his target price on marijuana player Mettrum Health, citing heightened potential for expansion and customer acquisition.
“Mettrum’s quarterly results were below our expectations however investors are less focused on current quarterly results,” said the analyst. “The current theme, in our view, is on the ability to expand and acquisition of patients.” Gilmer feels the company’s recent acquisition of Toronto-based chronic pain management firm Apollo Applied Research will help them do just that.
4. Supreme Pharmaceuticals (CSNX:SL)
Cash and Short Term Investments: $4.93-million (As of June 30, 2016)
That $4.93-million in cash for Supreme is about to go up. Way up. Supreme Pharma, which has a production facility in Kincardine, Ontario, recently closed nearly $15-million in a recent three-tranche financing. “This financing represents a big step in the growth of Supreme,” said CEO John Fowler. “We are well positioned to complete our phase 1 expansion of the hybrid greenhouse to satisfy wholesale demand in excess of current capacity. The participation from existing shareholders, directors, management and local investors from Kincardine demonstrates our stakeholders’ confidence in our organization and business plan. We are fortunate to have such a strong and supportive shareholder base moving forward.”
On November 15, Supreme announced that the financing would not be $15-million, but as much as $50-million.
5. OrganiGram Holdings (TSXV:OGI)
Cash and Short Term Investments: $3.73-million (As of May 31, 2016)
In July, PI analyst Jason Zandberg identified four marijuana stocks he felt were leaders in the space and initiated coverage of all of them with “Buy” rating. Those stocks were Aphria, Canopy Growth Corp., Mettrum Health and Moncton, New Brunswick-based, OrganiGram Holdings. Today Organigram’s cash position is about to soar as the company has entered into -you guessed it- a bought deal worth as much as $35-million.
Zandberg says OrganiGram is among the country’s lowest cost producers, in part because of low power and labour costs in New Brunswick. The company is also a certified organic operator, which he thinks will appeal to certain parts of the market.