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Six Technology and Cannabis Stocks for your portfolio

Investors are certainly navigating uncertain waters these days, as central bankers continue to swing the hammer against inflation and economies begin bending under the pressure. That makes for a difficult climate in the markets and for choosing which stocks might be a safe bet to make it through the turmoil.

On that note, Eight Capital published on Monday an equity research report that lists companies which should fare well across a range of sectors regardless of how strongly upcoming economic headwinds start to blow.

“With central banks displaying unease about inflation, stock market volatility will likely continue until the Federal Reserve is comfortable with these inflationary pressures,” the report says. “While history is spotty on the Federal Reserve’s ability to orchestrate a soft landing, we believe that as rates continue to rise, the risk of policy error may grow.”

The interest rates dynamic is clearly at play in the Technology space, where a rising rate environment can harm the net present value of growth-oriented names. The sector went through a nice rally over the summer, pulling stocks off their 52-week lows.

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Eight Capital analysts Christian Sgro and Adhir Kadve noted that, overall, less profitable but high-growth companies had a larger contraction in valuations over roughly the November 2021 to June 2022 period than their more profitable peers, but the inverse has been the case over the June, July and August period where high-growth names exhibited a stronger recovery. 

That scenario makes for two fairly distinct groups of stocks, the analysts said, namely, offensive and defensive plays.

“When we look at our coverage universe, we have identified names that fit well within these themes and we think they can outperform depending on the macro backdrop. Growth valuations are strongly negatively correlated to interest rates, making the path of interest rates a key determinant of relative strength going forward. Importantly, the names we have selected below, in our opinion, have demonstrated resiliency and durability in revenue and profitability growth, with fundamental risk to the upside,” Sgro and Kadve wrote.

On the offence side, the analysts highlighted Lightspeed Commerce (Lightspeed Commerce Stock Quote, Charts, News, Analysts, Financials TSX:LSPD) and kneat.com (kneat.com Stock Quote, Charts, News, Analysts, Financials TSX:KSI), while for defensive picks, they pointed to Kinaxis (Kinaxis Stock Quote, Charts, News, Analysts, Financials TSX:KSX) and VitalHub (VitalHub Stock Quote, Charts, News, Analysts, Financials TSX:VHI).

Lightspeed Commerce

Eight Capital rating: Buy

Target price: $47.00

Projected one-year return: 80 per cent (all returns are listed as of the publication date of Eight Capital’s report)

On Lightspeed, Sgro and Kadve said the point-of-sale (POS) tech company has several industry- and company-specific tailwinds in its favour. On the former, consumer behaviour is heading more in the direction of in-person retail and dining, the analysts said, which is good for LSPD’s business; meanwhile, many merchants are about to enter a refresh period on the POS tech where the move is now more towards cloud-based systems such as that on offer by Lightspeed. 

On the company-specific end, Sgro and Kadve said merchant additions, ongoing payments penetration and software annual revenue per user expansion are all positives for Lightspeed.

“While not a defensive name by any means, we believe that Lightspeed’s offering remains core to any of its merchants’ operations. Further, the company’s performance through the COVID-19 pandemic offers strong evidence of its ability to leverage the breadth of its offering and its geographic diversity to offset any disruptions to its business during times of macro-economic uncertainty,” the analysts wrote.

kneat.com

Eight Capital Rating: Buy

Target Price: $4.50

Projected one-year Return: 67 per cent

Software company kneat also fits in the offensive category but from the small cap perspective, according to Sgro and Kadve, since the company has captured just two per cent of a US$600 million total addressable market in the life sciences validation space, leaving plenty of room for growth.

“With eight of the world’s top ten life sciences companies now customers, we see Kneat’s model maturing with a focus on the “expand” leg of the growth phase. We think that this is making the rapid growth increasingly predictable. Importantly, we see this growth as resilient to any recessionary pressures, with customer expansion decisions driven by regulatory compliance and proven return on investment, not discretionary measures,” Sgro and Kadve said.

Kinaxis

Eight Capital Rating: Buy

Target Price: $230

Projected one-year Return: 60 per cent

Canadian supply chain management software company Kinaxis had a great run-up over the first stretch of the pandemic but has since pulled back. Sgro and Kadve said although valuation is still high on KXS at about 7x forward revenues, the company’s market leadership and proven execution need their due, and the analysts have named Kinaxis their top pick for the year, along with putting KXS in the Defensive camp.

“[W]e see Kinaxis taking full advantage of the supportive backdrop executing on partner enablement, aggressive headcount additions, and more tactical moves down-market,” they wrote. “Looking further out than H2/22, we remind investors that a historical 12-18 month sales cycle means that the company’s record pipeline isn’t just building for a strong H2 but rather a set-up for multiple years of strong performance. We continue to look out for increases to guidance (we think upside to current revenue and EBITDA guide) and analyst estimates, which we see as a continued path of positive catalysts.”

VitalHub

Eight Capital Rating: Buy

Target Price: $5.00

Projected one-year Return: 92 per cent

VitalHub, which has technology solutions for healthcare and human service providers including hospitals and regional health authorities, also got the nod as a defensive play from the small cap side, with Sgro and Kadve hailing its recurring revenues and consistent gross margins at around 80 per cent and its 20 per cent adjusted EBITDA margin profile, along with strong free cash flow conversion.

“The company’s consistent annual recurring revenue growth has led to several quarters in a row of consensus estimate increases, all in the face of FX headwinds with over 70 per cent of revenues generated in the UK. The business model is broadly segmented into ~70 per cent operational software in the UK government where VitalHub is a market leader,” they said.

“The other ~30 per cent is Electronic Health Record software (or “EHR”, can be thought of as ERP for healthcare institutions) in Canada, where the company’s niche focus on mental and community health has seen stronger-than-market growth. We see both segments as resilient. We think VitalHub’s valuation at less than 10x EV/ 2023 adj. EBITDA is attractive given the company’s predictable model and cash flow generative profile,” they wrote.

US cannabis stocks have been pummelled over the past year and a half, as investors have fled the sector in droves on waning optimism over federal legalization efforts. But 2021 was a banner year for the industry, Eight Capital analyst Ty Collin argued, and so with valuations having reset lower, many names have been significantly de-risked, setting up a favourable risk/reward skew today. Collin, who prefers US companies over the Canadian peers due to the superior fundamentals of the former along with their more direct exposure to key US regulatory catalysts, said even the federal reform picture seems to be clearing up.

“Key Senate leaders appear to have pivoted in support of a more moderate and realistic set of reforms like SAFE Banking, and we expect a concerted push from lawmakers to pass a bill before Congress changes over in January. In addition, our research suggests that cannabis is a recession-resistant product, giving us confidence that the sector could fundamentally outperform other consumer categories in a downturn,” Collin said.

With that in mind, Collin pointed to Curaleaf Holdings (Curaleaf Holdings Stock Quote, Charts, News, Analysts, Financials CSE:CURA) as his offensive pot stock pick and Green Thumb Industries (Green Thumb Industries Stock Quote, Charts, News, Analysts, Financials CSE:GTII) as his top pick for defence.

Curaleaf Holdings

Eight Capital Rating: Buy

Target Price: $16

Projected one-year Return: 104 per cent

On Curaleaf, Collin said in a risk-on environment, investment dollars are going to flow disproportionately to leadership names, with heavyweight CURA (over 100 retail dispensaries, 22 cultivation sites and 30 processing facilities across 23 states) featuring prominently. 

“CURA historically has adopted an aggressive posture towards growth and M&A, and has preferential access to capital to finance emerging opportunities,” Collin said. “CURA has broad catalyst exposure with the widest footprint among MSOs. In particular we think CURA’s unique exposure to Europe, and German legalization specifically, could draw outsized investor interest in a more risk-on environment.”

Green Thumb Industries

Eight Capital Rating: Buy

Target Price: $36

Projected one-year Return: 128 per cent

Another biggie in the US cannabis scene is Massachusetts-headquartered Green Thumb, which has a number of defensive qualities, according to Collin, including a leading margin profile and cash flow generation, a diversified geographic footprint, historically prudent capital allocation and preferential access to capital.

“GTII’s balance sheet and earnings quality stand out from the group, underpinned by moderate leverage, a strong liquidity position, and leading cash flow conversion.,” Collin said. “Though our top defensive pick among MSOs, GTII also offers offensive characteristics with exposure to nearly every key catalyst market including NY, NJ, VA, PA, OH, and MD.”

About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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