The cannabis sector is far from a sure bet, especially over the past couple of years where stocks across the board have plummeted in value. Companies doing business in the United States continue to be hampered by federal banking restrictions and a lack of progress on legalization, while here in Canada, stiff competition has made it tough for companies to establish themselves both in terms of production and retail, with many of the early favourites in Canada’s still-young industry now dealing with massive quarterly losses and tempered growth prospects.
But bright spots are certainly out there, especially in the rise of smaller, often premium cannabis producing businesses that are grabbing market share from the bigger, more well-known players. Here to guide investors in picking the wheat from the chaff, Cantech has three picks all with either Buy or Outperform ratings from analysts.
Rubicon Organics (Rubicon Organics Stock Quote, Charts, News, Analysts, Financials TSXV:ROMJ) is a Delta, BC-based producer of super-premium cannabis with certified organic products. The company recently reported quarterly earnings that saw revenue climb by 71 per cent to $8.8 million, and ROMJ has positive earnings, too, delivering a fourth consecutive quarter of positive adjusted EBITDA at $0.2 million.
Raymond James analyst Michael W. Freeman says Rubicon continues to execute on profitability and efficiency while putting out quality products for customers.
“We applaud ROMJ driving positive operating cash flow and adj. EBITDA this quarter and growing 1Q23 Rev. materially Y/Y. Now, the name of ROMJ’s game is to expand sales of its highest-margin products (Simply Bare brand), while maintaining sales of ROMJ’s lower-margin, higher-velocity products (e.g. 1964 brand). We believe ROMJ’s strong 1Q23 operational execution and continued traction with customers in the premium segment set the company up well for a profitable FY23,” Freeman wrote in a May 23 report.
For 2023, Freeman is forecasting ROMJ’s revenue at $63 million and EBITDA at $8 million. Freeman maintained an “Outperform” rating on the stock and 12-month target price of $3.00, which implied at the time of his report’s publication a projected return of 500 per cent.
“We are confident that ROMJ can meet its FY23 growth aspirations given its outstanding control over internal processes and its focused attention on consumer demand in the premium segment, as demonstrated through FY22,” he said.
Another Canadian craft grower is Decibel Cannabis (Decibel Cannabis Stock Quote, Charts, News, Analysts, Financials TSXV:DB). Based in Calgary, Decibel grows premium cannabis and has a retail line under the Prairie Records banner.
Decibel has quickly risen to the top of the cannabis trade and currently stands as the third-largest licensed producer in Canada with a 6.7 per cent market share. It’s also been growing its top and bottom lines, pushing revenue up 63 per cent in its most recently reported quarter to $27.1 million and growing its adjusted EBITDA by 175 per cent to $6.8 million.
Freeman said the results have been super for this diamond in the rough.
“DB is a much-overlooked top-2/3 player in Canadian cannabis, trading at a material discount to peers, so we highlight this as a name our clients should be aware of, particularly in light of these extraordinary 1Q23 results,” Freeman said in a May 29 report.
Freeman has high hopes for this pot stock and maintained an “Outperform” rating and one-year target price of $0.40, which at press time represented a projected return of 208 per cent.
“We are impressed with DB’s strong and durable sales growth, particularly during the seasonally slow 1Q period in Canadian cannabis. And, DB’s industry-leading 49 per cent gross margin profile (before FV adj.) underscores the company’s attractive production model coupled with manufacturing and distribution strength,” he said.
Finally, we have Village Farms (Village Farms Stock Quote, Charts, News, Analysts, Financials NASDAQ:VFF), which has been an established player since the beginning of Canada’s legal pot trade but perhaps one with less cachet than the more well-known brands.
Village Farms is a big greenhouse vegetable grower across North America with the foresight to jump into growing cannabis as a lucrative addition to its business. So far, the plan has worked out very well, with VFF reigning for years now as the best low-cost producer in the business.
The company saw its revenue dip in its most recent quarter, down eight per cent to $64.7 million, but adjusted EBITDA was positive $0.5 million compared to negative $6.1 million a year earlier.
Beacon Securities analyst Doug Cooper feels that while consolidation will continue in Canada’s cannabis sector, more than any other company Village Farms is in the best position to emerge as a powerhouse.
“VFF is the most profitable cannabis company in the country with an EBITDA margin of ~15 per cent. The forced exit of a number of companies should leave VFF an opportunity to significantly grow its share. In essence, we believe the writing is on the wall that VFF will be the big winner in the Canadian market,” Cooper said in a May 30 report.
Cooper reiterated a “Buy” rating while moving his 12-month target on VFF from $4.50 to $2.50, representing at press time a projected return of 252 per cent.