As the Coronavirus drives pot stocks further downward, which stocks are on their way out, and which are seemingly undervalued? Find out in this article.
Anyone that’s had their finger on the pulse when it comes to cannabis companies has known that many of the companies we see today may not be around in the next five years. Continuing federal illegality, difficulty in accessing financial institutions and the newness of the industry all coalesce to make the global cannabis industry pretty rocky territory for those within it.
During 2018, capital was flowing into the sector like water from a firehose, with investors desperate to get their hands on a slice of the pie. Unfortunately for cannabis companies, however, the hype quickly wore off, and so too did the flow of capital into the sector. This created the capital crunch of 2019, where we saw many of the major players within the space struggle to make ends meet.
Immediately it became very clear that those without cash, and near-term profitability, wouldn’t stay afloat.
As a result, major players like MedMen began effectively taking a slow walk to their grave, and even giants like Tilray, whose valuation was at an astronomical $7.5 billion last year, is now worth just $317 million.
Then, like putting salt into an open wound, there was the vaping crisis of October last year which now seems like just a hiccup compared with the COVID-19 crisis that’s upon us. The industry already had its hands full, and now, coronavirus has kicked in and sent the world into a tailspin — with undercapitalized cannabis companies in some of the worst positions to deal with the fallout.
Bankruptcies are now beginning, with companies like CannTrust finally throwing in the towel after its debaucherous illegal grow-op that was discovered last year, and even established giants like Aurora haven’t escaped unscathed. Despite being one of the most popular, well-known cannabis stocks on the market, Aurora — like many of its ilk — has been hemorrhaging cash, and this simply doesn’t jive with investors. As a result, Aurora lost approximately 92% of its value since mid-March 2019, and we believe it will sink even further in value.
Understandably, investing in pot stocks right now can seem like a risky move, but as Warren Buffett says, sometimes you need to “be greedy while others are fearful.”
And with the Global Cannabis Index down by over 50% of its value in this last handful of months, we believe there are some solid stocks in the fray that are being sold at a fraction of their true worth.
Green Thumb Industries (CSE:GTII)
Green Thumb Industries (CSE:GTII) is a US Multi-State Operator (MSO) with retail outlets across 12 U.S. markets. GTI manufactures and distributes a portfolio of branded cannabis products, as well as owning and operating rapidly growing national retail cannabis stores called Rise and Essence.
Headquartered in Chicago, Illinois, GTI has accrued 13 manufacturing facilities, as well as operating 39 retail stores with a total capacity of 101 licenses. On top of this, Green Thumb Industries wholesale their products to other retail outlets and dispensaries, giving the company maximum coverage in all States it currently operates in and placing GTI’s products in every imaginable nook and cranny in the US.
GTI is embedding itself deeply into Illinois, who legalized cannabis at the start of this year. The company now operates seven stores that offer adult-use sales in Illinois, two of which are the only adult-use only stores in the state. Moreover, the company also sells its branded products wholesale to every other dispensary in the state. With Illinois generating over $100M in three months of cannabis sales alone, it’s clear that GTI will see significant growth on this front.
In Pennsylvania, the company has nine dispensaries open, with licenses for an additional nine. Just like Illinois, Green Thumb also sells its products wholesale to other dispensaries, and now covers 98% of the available retail outlets.
Evidently the ubiquity of Green Thumb Industries’ product range is paying off for the company, as GTI’s fourth-quarter results for December 2019 results showed that the company’s revenue increased 246.3% year-over-year to $216.4 million. On top of that, GTI finished the quarter with $46.7 million in the bank, and through a sale and leaseback deal with Innovative Industrial Properties, GTI’s bank account grew by a healthy $57.2 million, putting the company in a strong position to continue its aggressive expansion model.
Green Thumb Industries is well funded, is seeing strong revenue growth and has been deemed an “essential” business amid the COVID-19 pandemic, meaning its stores will likely benefit from the boost in cannabis sales that is currently occurring.
As Green Thumb’s stocks are worth less than half of what they were at this time last year despite their growing profits and solid business model, we think this stock is definitely undervalued.
Organigram Holdings (NYSE:OGI) is a licensed producer of cannabis and cannabis-derived products. Through its wholly-owned subsidiary, Organigram Inc, OGI also produces medical marijuana products for patients in Canada.
OrganiGram is an attractive company for a number of reasons, the first of which is the company’s growing network of strategic business partnerships. Organigram has started to develop a hefty portfolio of legal adult-use recreational cannabis brands including The Edison Cannabis Company, Ankr Organics, Trailer Park Buds, Trailblazer and PAX vaporizer pods.
These partnerships put OGI in a comfortable position while Canada begins to find its feet with Cannabis 2.0 products, as OGI has already started shipping Trailblazer vaporizer cartridges in December 2019, and will be releasing PAX Era vape cartridges in the coming quarter. Additionally, the company plans to release cannabis-infused chocolates and fast-absorbing cannabis powders in the coming months (this has been delayed due to COVID-19) which will enjoy the higher profit margins associated with cannabis derivatives when compared with raw flower.
Furthermore, through the use of OGI’s proprietary software system OrganiGrow, and the company’s self-described “relentless culture of continuous improvement”, OrganiGram has one of the lowest cultivation cost per gram among its peers, in addition to setting up wholesale supply agreements in place with each of Canada’s 10 provinces. This had led to the enormous, and consistent growth in OGI’s wholesale revenues with the company bringing in $9.5 million in the most recent quarter and $9.2 million in the previous quarter, up from $0.6 million in Q3 of 2019.
Though most impressive of all are OrganiGram’s financials, which far surpassed analysts’ expectations. In the most recent quarter, OrganiGram’s net revenue more than doubled to $25.2 million from $12.4 million in the first quarter of 2019. Additionally, for the fiscal year of 2019, as well as the first quarter of 2020, OrganiGram reported a positive EBITDA — a feat which many of its Canadian competitors only dream of.
Althea Group Holdings (ASX:AGH)
As far as the Australian cannabis landscape goes, it’s hard to look beyond Althea Group Holdings (ASX:AGH).
Althea is a medicinal cannabis company that focuses on cultivating, producing, manufacturing, and distributing medicinal cannabis products throughout Australia, the United Kingdom, Canada, and Germany.
The company is one of the few Australian cannabis players that possess the full range of licenses from the Office of Drug Control (ODC) and Agriculture Victoria, allowing the company to supply its patients with its pharmaceutical grade, full spectrum medicinal cannabis products.
The reason we believe Althea is undervalued is because on virtually every front, AGH is moving in the right direction.
The company is seeing exponential growth in its patient numbers, with February bringing in 617 new patients to Althea — representing the second-highest month in the company’s history for patient additions. In total, Althea prescribes its products to over 5,000 patients, representing over a quarter of Australia’s total medicinal marijuana patient share.
This growth in patient numbers is being accelerated by the trusted brand that Althea has developed, which has led to 459 Australian healthcare professionals now prescribing Althea’s products. This represents 40% of all medical professionals in the medicinal cannabis space.
When it comes to the numbers, Althea is seeing robust growth, with the company reporting a 963.8% increase in revenues for the latter half of the year in 2019, bringing AGH’s revenue up to $1.851 million for the 6 months ending December 2019. Admittedly, the company spent over $8.3 million for the half-year, which was a sizeable increase over the $2.3 million spent in the half-year for 2018, though the company’s revenue growth is outpacing its expenses, and Althea still has a healthy $15.5 million in the bank.
Another exciting facet of Althea is the company’s Peak Processing facility in Ontario, which sits at 3,716 square meters and is one of the first large-scale independent processing facilities capable of manufacturing and distributing cannabis 2.0 products such as cannabis edibles, concentrates, topicals, and beverages.
This extended array of cannabis form factors known as Cannabis 2.0 products are able to be sold at much higher profit margins when compared with dried flower and cannabis oils, and due to their very recent legalization, there are few licensed producers in Canada that are able to manufacture such products. This foray into a relatively untapped Canadian market will see Althea’s revenues soar even higher.
MGC Pharma (ASX:MXC)
MGC Pharmaceuticals (ASX:MXC) is a European-based seed-to-pharma biotech company that is developing cannabis-derived medicines to treat a range of different conditions, as well as developing the global distribution network for those products to be prescribed worldwide.
MGC has standardized cannabinoid medicines with varying compositions of CBD and THC, as well as formulations designed to treat specific conditions such as Alzheimer’s, Crohn’s Disease, Epilepsy, and various forms of cancer pain.
The company’s main asset is its European medicinal cannabis compounding and manufacturing facility in Ljubljana, Slovenia, which has received both Good Manufacturing Practice (GMP) Certification and a Manufacturing Licence, making the Slovenian Facility one of the most advanced in Europe when it comes to the development of cannabinoid medicines.
Additionally, the company is moving ahead in the construction of its Malta facility, which will be similarly GMP certified and will allow the company to materially scale up its existing production capacity and revenue generation.
Through strategic partnerships, MGC Pharma has set up distribution deals to have its products prescribed throughout Europe starting with the UK and Ireland, as well as Australia, Brazil, Peru and Poland, which is resulting in serious increases in the company’s revenue stream, and patient prescriptions.
In the company’s most recent half-yearly report, MGC enjoyed an 85% increase to its purchase order volumes in January, rising from 2,000 to 3,700, and saw its revenue climb to AUD$1.77 million, a massive 520% increase over the previous year. The company also recently surpassed the 2,000 patient milestone, which is leaps and bounds beyond their mere 100 patients in August 2019.
MGC Pharma is laying the foundations for a profitable future, with growing networks and patient bases across the globe, helping to generate growing revenue streams. Moreover, the company just completed a Share Purchase Plan to provide it with $2.1 million in capital, which will keep MGC afloat through the COVID crisis.
With shares worth roughly half of what they were in January this year, we think MGC is definitely a bargain.