Three good-looking cannabis stocks for your portfolio

Cannabis companies got a much needed lift on Monday as the market reacted to potentially positive news on marijuana reform in the United States. Stocks like Florida-based Trulieve Cannabis (Trulieve Cannabis Stock Quote, Charts, News, Analysts, Financials CSE:TRUL) and Chicago-based Green Thumb Industries (Green Thumb Industires Stock Quote, Charts, News, Analysts, Financials CSE:GTII) rose sharply on news of a draft bill being circulated in US Congress which fills in some details on what legalized cannabis might look like at the federal level in terms of taxation and state jurisdiction. 

But the sector is still mired in almost a year-long slump and stocks are down by half or even more, especially in Canada where competition for limited consumer dollars grows tighter even as the field remains chock full of contenders.

On some stocks, the lowered share prices could present an opportunity, and to help investors pick the right ones analysts have given the nod to a few key picks. Here are three from the Canadian contingent, all with recent Buy ratings.

We start with Village Farms International (Village Farms Stock Quote, Charts, News, Analysts, Financials VFF:TSX), a greenhouse vegetable grower that entered cannabis in a big way through now a 100 per cent ownership in BC-based Pure Sunfarms and a CBD business in the US. 

The company just released third quarter numbers which Beacon Securities analyst Doug Cooper said were better than expected with strong margins coming from Pure Sunfarms. On produce, VFF posted $41 million in sales and $1.3 million in EBITDA, hitting positive again after a loss of $4 million in the previous quarter, while Canadian Cannabis sales were a record $34.5 million, up 53 per cent year-over-year and up 13.5 per cent sequentially. (All figures in US dollars except where stated otherwise.)

Cooper reflected on the quarter in a Tuesday report, calling Village Farms the best run operator in the Canadian cannabis sector and referred to the company’s very strong adjusted gross margin in that segment of 51 per cent.

“[VFF’s third quarter results] are even more impressive when compared to its peers. A quick look at their recent results tells the tale of the tape. Canopy reported 12 per cent gross margins as did HEXO, who is also in violation of its debt covenants. In its last reported quarter, Organigram reported negative gross margins. We believe CPG companies will likely NOT make money if gross margins are not 30 per cent or above,” Cooper wrote in his report.

“Those aforementioned companies have a long way to go and will likely never achieve satisfactory results. Tilray’s last quarter showed a 13.5 per cent DECLINE in its proforma y/y results in the Canadian adult use market and Cronos announced it will miss its filing deadline, which doesn’t portend for strong results. Finally, Aurora will report its quarterly results later this week, which are expected to be weak. In contrast, PSF grew 53 per cent y/y, reported adj gross margin (ex depn) of 51 per cent and EBITDA margin of 31 per cent,” he said.

With the update, Cooper reiterated his “Buy” rating for VFF and $25.00 target price, which represented a projected one-year return of 125 per cent. (All listed returns are as of the publication date of the analyst’s report.)

Next up is High Tide (High Tide Stock Quote, Charts, News, Analysts, Financials TSXV:HITI), a cannabis accessories and retail cannabis outlet company headquartered in Calgary. High Tide recently made the move of effectively becoming a discount club cannabis retailer for Canada by converting its Canna Cabana stores to a discount club model, offering members access to lower prices and exclusive deals in a Costco-type way. 

ATB Capital Markets analyst Frederico Gomes said after positive signs from a pilot program adopted earlier this year, HITIs new model may produce a decrease in gross margins but higher sales per store, although there are risks involved.

“In our view, HITI’s strategic shift is a reaction to the fierce competition in the Canadian cannabis retail market, with deep discount retailers significantly undercutting prices. We view a discount club as a way for HITI to capture market share and differentiate itself from other retailers while building customer loyalty and brand equity. We note, however, that a discount club model would have to be adapted to the unique circumstances of the Canadian cannabis market, therefore carrying uncertainty and execution risks,” Gomes wrote in an October 20 report.

Gomes has an “Outperform” rating for HITI with a $14.00 target, which represented a total projected return of 48 per cent.

At the smaller end of the scale we have Winnipeg-based Delta 9 Cannabis (Delta 9 Stock Quote, Charts, News, Analysts, Financials TSX:DN), which is both a retailer and a licensed cannabis producer and wholesaler. The company just opened its 16th store in Canada, this one also in Winnipeg, with management saying it plans to keep expanding its retail presence across the country.

Research Capital Corp analyst Venkata Velagapudi reported on the company in a November 2 update to clients, saying his bull thesis on Delta 9 relies on its retail expansion strategy across Canada, and Velagapudi sees a big valuation gap between the stock and its peers.

“Based on our analysis, the current market price of Delta 9 implies a large valuation gap within the Canadian universe of cannabis retail players and LPs. We believe that the expansion of Delta 9’s retail footprint and wholesale revenue generation beyond Manitoba will be the key triggers for Delta 9’s share price,” Velagapudi wrote. 

“Margin improvement driven by Delta 9’s focus on ancillary sales, incremental sales by data sharing and premium shelf space agreements with LPs may lead to an expansion of valuation multiples. Visibility over the sustainability of Delta 9’s market share in retail and wholesale segments will be a key catalyst for the stock price, over the long-term,” the analyst said.

With the update, Velagapudi maintained his “Buy” rating for Delta 9 and $1.00 target which represented a projected one-year return of 156 per cent.