Cannabis seems to be no one’s favourite game at the moment, with the sector having lost pretty much all of its lustre over the past half year. US stocks are down, Canadian names are way down.
And while US companies at least have the golden apple of potential reform at the federal level to keep investors interested, Canada’s pot stocks seem to be facing dimmer prospects. This year’s market growth will be in tough to match last year’s pandemic-fuelled spike, meanwhile after almost three years out from adult-use legalization, many of the major companies in the space have yet to turn a profit.
But investors who dig a little deeper might still find some gems in the Canadian landscape. To wit, here in no particular order are three smaller but potentially more potent brands.
Starting with Decibel Cannabis (Decibel Cannabis Stock Quote, Charts, News, Analysts, Financials TSXV:DB), a western Canada-based licensed producer and retailer focusing on craft cannabis. Formed out of a combo of We Grow BC and Westleaf Inc, Decibel has the Qwest premium brand and the General Admission mid-market brand and has been busy grabbing market share away from bigger, more well-heeled names in the industry.
Over the first quarter 2021 across BC, Alberta, Saskatchewan and Ontario, Qwest was the number one premium flower in sales with an 8.4 per cent market share. Not bad for a $93 million market cap company with $12.4 million in net sales in its most recent quarter, Decibel’s second quarter, announced last month.
One fan of the company would be Raymond James analyst Rahul Sarugaser, who initiated coverage of DB in August with an “Outperform 2” rating and $1.00 target price. Sarugaser said Decibel has become a dominant craft player with a #9 market share position among all Canadian LPs by retail sales, capturing about three per cent of the adult use market in the process.
Sarugaser said Decibel also has the advantage of using its wholly-owned Prairie Records cannabis shops as a way to test and launch new products, giving it an ear to the ground among the still-developing cannabis crowd.
“DB’s marriage of ultra-premium priced, microgrow-quality cannabis, strong-selling mid-market offerings, deep roots in cannabis culture (Canada and U.S.), and national-scale production and distribution is what makes this company so notable in our eyes,” said Sarugaser in his report on August 19.
“DB is already punching well above its weight among Canadian LPs—capturing significant market share with its quick revenue ramp during the last 5 quarters—but we believe DB is on the cusp of an even more intense revenue inflection as the company realizes a >400% scaling of its cultivation operations by ~4Q21.
At the time of releasing his report, Sarugaser’s $1.00 target represented a projected one-year return of 212.5 per cent.
Next up is Canadian cannabis retailer Fire & Flower (Fire & Flower Stock Quote, Charts, News, Analysts, Financials TSX:FAF), which owns stores across Canada under a number of banners — Fire & Flower, Friendly Stranger, Happy Dayz and Hotbox — and has a strategic investment from convenience store giant Alimentation Couche-Tard, through which the company is planning on expanding into the US and internationally.
The company released its second quarter 2021 financials in September, showing revenue up 51 per cent year-over-year to $43.3 million and representing FAF’s fifth consecutive quarter of positive adjusted EBITDA at $3.1 million.
But along with its stores, Fire & Flower has Hifyre, the company’s cannabis retail sales data, e-commerce and analytics platform. According to ATB Capital analyst Kenric Tyghe, Hifyre is a key differentiator for FAF.
“We believe that Hifyre, a diversified cannabis tech platform owned by Fire & Flower, is being ascribed little to no value by the market because Fire & Flower is viewed solely as a cannabis retailer. As the Company grows its digital revenue streams, we believe that the value of Hifyre as a tech platform will become more apparent, offering an attractive potential upside for investors,” Tyghe wrote in his update to clients on September 9.
With his update, Tyghe reiterated his “Outperform” rating for FAF and one-year target of $1.90, which at the time of publication represented a projected return of 111.1 per cent.
Finally, we have London-Ontario-based Indiva (Indiva Stock Quote, Charts, News, Analysts, Financials TSXV:NDVA), a licensed producer focusing its efforts on the edibles market. That market is still small at only about five per cent of current total adult-use sales, but as Sarugaser wrote in his report to clients on Indiva on September 7, the company is crushing it with around 50 per cent of the Canadian edibles market share.
Sarugaser said Indiva is leveraging marquee license agreements it acquired with popular and established US brands in Wana gummies an Bhang chocolates. And with Sarugaser forecasting edibles to eventually reach about 15 per cent of the overall adult-use cannabis market in Canada, that means Indiva will clean up.
“This, folks, is an M&A target if we’ve ever seen one,” Sarugaser wrote. “Some context: In April, Canopy Growth acquired Supreme Cannabis, a company with smaller market share than NDVA, albeit operating in a different category, for ~$435 million. Again, NDVA’s market cap is $50 million. The asymmetry we see here is stunning.”
With his report, Sarugaser reiterated his “Strong Buy 1” rating on Indiva and target of $1.75 per share, which at press time represented a projected one-year return of 316.7 per cent.
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