Canadian pot stocks. Dead money?
The clouds have moved in over the Canadian cannabis space.
Lackluster results from presumptive leader Canopy Growth Corp and a full-blown scandal via CannTrust Holdings have combined with a hundred smaller cuts to sink the returns for hot money investors used to what seemed like one-way bets.
The Horizons Marijuana Life Sciences Index ETF, which climbed sharply from last December’s bottoms to a 2019 peak of $23.65 in March, has taken a double black diamond run to the bottom as cooler weather approaches. The ETF, which tracks a broad swath of cannabis stocks, closed August at just $14.14.
So what to make of the risk/reward profile for pot stocks? Some are saying they will simply never recover.
Others say there will only be a handful of winners.
Here at Cantech Letter, where we track the actions of scores of analysts, we are finding some optimism for certain issuers. In fact, certain recent reports have been downright bullish on Canadian pot stocks. We give you five Canadian-listed cannabis stocks that analysts think will deliver triple-digit returns. We list these stocks in order of projected return and all targets imply a 12 month window from the publication date.
“Incredibly undervalued” Canadian pot stock
Indus Holdings (Indus Holdings Stock Quote, Chart, News CSE:INDS)
Analyst: Beacon Securities, Doug Cooper
Projected Return: 411 per cent
INDS has an “incredibly positive” risk-return, according to Beacon Securities analyst Doug Cooper, who on August 23 issued an update on the company and a review of its quarterly financials.
Cooper says the transition to positive EBITDA for Indus will come from revenue growth and margin growth. The analyst says the stock is “incredibly undervalued” compared to its peers. The US peer group, Cooper pointed out, trades at an average of 16x last quarter annualized sales whereas Indus trades at 3x.
“Such a dramatic discount would seem to indicate the market is concerned about its balance sheet,” Cooper said. “However, with $25m in cash ($15m ex cash for W Vapes), minimal near-term cap-ex ($2-$3m to finish greenhouse) and cash flow positive in Q4, and W Vapes is CF positive, we do not believe this is an issue. A market multiple would imply a C$23.00 stock price.”
The analyst is maintaining his “Buy” rating and C22.50 target, which implied a return of 411 per cent at the time of publication.
387 per cent upside…
Vireo Health International (Vireo Health International Stock Quote, Chart, News CSE:VREO)
Analyst: M Partners, Damian Karp
Projected Return: 387 per cent
M Partners analyst Damian Karp delivered a review of VREO’s latest quarterly results on August 29 and reiterated his “Buy” rating and C$9.25 target price, which translated to a projected 12-month return of 387 per cent at the time of publication.
Karp says Vireo’s quarterly revenue came in-line with his expectation, with growth driven by increased patient counts in Minnesota and New York, wholesale revenue in Maryland and Pennsylvania and contributions from recently closed acquisitions in Arizona and New Mexico. The analyst says that VREO’s EBITDA will continue to improve as individual states stabilize their markets. The analyst likes the positioning of Vireo Health in its home state.
“Minnesota has begun plans to adopt an adult use market in 2020. As Vireo is only one of two operators in the state we believe they are positioned well to take advantage of their first mover status. We estimate the adult market to be worth approximately $275 million in 2020. We also expect Pennsylvania retail to open in early Q4/19. Merit based applications have been submitted for New Jersey and Missouri,” Karp said. “We anticipate strong performance from the Company moving forward as it begins to generate revenue in the seven additional states in which it has recently entered.”
“… Undervalued by most any metric”
iAnthus Capital Holdings (iAnthus Capital Holdings Stock Quote, Chart CSE:IAN)
Analyst: Echelon Wealth Partners, Matthew Pallotta
Projected Return: 213 per cent
Following Q2 results, analyst Matthew Pallotta of Echelon Wealth Partners commented in an August 27 research update to clients on how IAN stock was flagging and how this represented an opportunity for investors looking for value in Canadian pot stocks.
“The recent weakness in the stock price over the past two weeks since we first published on iAnthus has been, in our view, largely unrelated to any fundamental changes in the business and has also been seen in the share prices of its MSO peers. We continue to view the sell-off in MSOs as largely sentiment-driven, possibly exacerbated by some downward revisions to consensus estimates, which we feel, in many cases, were aggressive to begin with,” Pallotta wrote. “Aside from changes in the expected timing of certain assets being approved to become operational (e.g., Nevada dispensaries, Florida dispensaries and adult-use approval in MA), directionally, the business operations appear to be progressing in line with our expectations. As noted in our recent initiation report, the Company is undervalued by most any metric, and even assumptions that are considerably more conservative than ours would suggest the stock is trading at a meaningful discount at current levels,” he wrote.
Pallotta maintained his “Speculative Buy” rating and C$10.00 target price on iAnthus Capital, a figue that represented a projected return of 213 per cent at the time of publication.
“Bullish 2020 outlook…”
Curaleaf Holdings (Curaleaf Holdings Stock Quote, Chart, News CSE:CURA)
Analyst: GMP Securities, Robert Fagan
Projected Return: 182.4 per cent
The second quarter results from US multi-state operator Curaleaf Holdings look good but the future looks even better, according to GMP Securities analyst Robert Fagan, who on August 28 reported on CURA’s Q2 in an update to clients.
“In our view, CURA’s robust Q2 proforma sales and bullish 2020 outlook underpin the strength and breadth of the company’s aggregate platform which sets it apart from most of its competition,” Fagan wrote.
The analyst focused on CURA’s Q2 proforma revenues which came in at about $440 million annualized, about 40 per cent higher than its next closest peer, and on the company’s 2020 proforma guidance, which calls for revenues of $1 billion to $1.2 billion, the highest revenue outlook to date. Fagan noted that the figure does not include potential rec marijuana contributions from the state of Illinois or any others where conversions to a rec market are possible. All that growth should be supported by the company’s large pending acquisitions and capacity expansion planned across its full platform (with production expected to go from 1.3 million sq ft in 2019 to 2.3 million sq ft in 2020.
Possible target hike?
Green Thumb Industries (Green Thumb Industries Stock Quote, Chart, News CSE:GTII)
Analyst: GMP Securities, Robert Fagan
Projected Return: 171.4 per cent
Following the company’s second quarter results, GMP Securities analyst Robert Fagan was impressed by GTII’s operational track record and hinted that a target raise could be in the works for a company he thinks has separated itself from other Canadian pot stocks.
Fagan, in a client update issued on August 29, noted that the $44.7 million in sales the company posted was well ahead of his $38 million estimate and the Street’s $39 million, while the $5.7 million in EBITDA marks the first profitable quarter for the company and beat both his estimate of $4.6 million as well as the consensus $0.2 million. The company’s gross margin of 54.6 per cent Fagan calls solid.
“In our view, GTII’s impressive Q2 results further reinforce its MSO-leading operational track record,” Fagan said. “In addition, GTII’s advanced platforms in several high-growth end-markets (MA, IL, PA, etc.) point to a robust outlook. We note we have yet to reflect IL REC sales in our forecasts, where GTII is strongly positioned amongst peers. This could translate to target price upside of ~$5– $7/share, reflecting the highest valuation torque to IL REC amongst our covered names.”