Why Cannabis Stocks are Cheap, and What’s Next (ACB, CGC, SNDL,GRWG, TLRY, IIPR, SGMD)

The overall cannabis patch is now clearly a value play while retaining the sense in which it is also a growth play on a larger timeframe. It’s a rare feature in a market space. 

You can size this up as a feature of expectations around US federal legislation. However, it is a signal feature of the group that even the big Canadian names also trade at an attractive 14x EV/EBITDA multiple on average despite their very healthy growth and promising forecasts.

That’s interesting, given that the stable explanation for the lag is disappointment in US lawmakers in terms of the expected time horizon for seemingly inevitable changes at the national level in US legislation.

It’s like an infection. But it may offer a huge opportunity to investors in search of strong long-term upside potential with relatively little seeming risk from a fundamental perspective.

This may have major implications for stocks in the space, including Aurora Cannabis Inc (NASDAQ:ACB), Canopy Growth Corp (NASDAQ:CGC), Sundial Growers Inc (NASDAQ:SNDL), GrowGeneration Corp (NASDAQ:GRWG), Tilray Inc (NASDAQ:TLRY), Innovative Industrial Properties Inc (NYSE:IIPR), and Sugarmade Inc (OTCMKTS:SGMD).

 

Aurora Cannabis Inc (NASDAQ:ACB) engages in the production, distribution and sale of cannabis products. It also produces and sells indoor cultivation systems and hemp related food products. 

The Company’s brand portfolio includes Aurora, Aurora Drift, San Rafael ’71, Daily Special, AltaVie, MedReleaf, CanniMed, Pedanios, Whistler, and Reliva CBD. According to company materials, “Providing customers with innovative, high-quality cannabis products, Aurora’s brands continue to break through as industry leaders in the medical, performance, wellness, and recreational markets wherever they are launched.”

Aurora Cannabis Inc (NASDAQ:ACB) recently announced, through its subsidiary Aurora Germany GmbH, that it has delivered its initial shipment of cannabis to the French medical cannabis pilot program, set to begin serving patients in the coming weeks. Aurora and Ethypharm were selected by the National Agency for the Safety of Medicines and Health Products (ANSM) to supply the entire medical cannabis dried flower range (three lots of the tender) to French patients during the pilot program.

“The first prescriptions of dried medical cannabis as part of the French pilot program are a significant step toward providing access to patients and will support the destigmatization of medical cannabis in France,” says Miguel Martin, Chief Executive Officer of Aurora Cannabis. “This accomplishment is another example of Aurora’s leadership in global cannabis, with a proven track record of supporting the advancement of international medical cannabis markets alongside government bodies. By demonstrating a deep commitment to compliance and focus on product quality, we won three of the nine available tenders. If successful, this pilot program could lead to one of the largest regulated medical cannabis markets in Europe.”

The context for this announcement is a bit of a bid, with shares acting well over the past five days, up about 3% in that timeframe. ACB shares have been relatively flat over the past month of action, with very little net movement during that period. 

Aurora Cannabis Inc (NASDAQ:ACB) managed to rope in revenues totaling $55.2M in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top line growth of -27%, as compared to year-ago data in comparable terms. In addition, the company has a strong balance sheet, with cash levels exceeding current liabilities ($526.9M against $131.7M).

 

Sugarmade Inc (OTC US:SGMD) has been putting together a vertical model in the California cannabis space that seems set to suddenly take the world by surprise at some point, possibly soon, so we wanted to put it on your radar.

The company is building a unique farm-to-door operation, with a growing licensed cannabis footprint. It has recently acquired a property capable of producing 64 tons of flower, and has control over Nug Avenue, which appears to be one of the fastest growing cannabis delivery operations in the LA area.

Sugarmade Inc (OTC US:SGMD) just this morning announced something that seems poised to accelerate that growth exponentially: the signing of a Definitive Agreement to obtain three non-storefront California Cannabis licenses from the Los Angeles Department of Cannabis Regulation, along with corresponding licenses from the California Bureau of Cannabis Control, which collectively provide for the licensing of three new vertically integrated Nug Avenue cannabis delivery hubs.

According to its release, each of the three licenses can be used for up to three of the five categories of licensed cannabis-related business activities allowed under the terms of these licenses: retail delivery, manufacturing, distribution, transport-only, and cultivation. By using each license for a combination of 1) retail delivery of cannabis products, 2) supply chain distribution of cannabis products, and 3) manufacturing/packaging of cannabis products, the Company now possesses the licensing credentials to open three new Nug Avenue locations in the Los Angeles metropolitan area. As announced in its release dated August 17, the Company has already acquired a property in Los Angeles that will serve as the first of these new Nug Avenue cannabis delivery hubs. 

“Once we have put all of these new licenses to use, we will have quadrupled our distribution footprint in the world’s largest cannabis market,” noted Sugarmade CEO Jimmy Chan. “We also continue to move toward establishing our own cultivation operations. Together, these steps are part of our core vision – to establish a full farm-to-door vertically integrated cannabis company capable of driving a much greater percentage of total sales to the bottom line for our shareholders, while capturing much greater control over product quality for our customers.”

Sugarmade Inc (OTC US:SGMD) hasn’t been breaking out in recent action, but the fundamental story here seems to line up well as a potentially interesting speculative opportunity for those willing to take some portfolio risk in a risky high-growth-potential market space at the micro-cap side of the spectrum.

 

Tilray Inc (NASDAQ:TLRY) frames itself as a global cannabis-lifestyle and consumer packaged goods company with operations in Canada, the United States, Europe, Australia, and Latin America. The firm is focused on medical cannabis research, cultivation, processing, and distribution of cannabis products worldwide. Its products include dried cannabis and cannabis extracts. 

TLRY operates through its Cannabis and Hemp segments. The Cannabis segment consists of adult-use, medical and bulk sales of cannabis under regulated licenses and sold to retail, wholesale, pharmacy, government, and direct to patient. The Hemp segment consists of hemp seed, hemp foods, board spectrum hemp extract containing CBD, which are sold in an unlicensed operation and sold to retail, wholesale and direct to consumers. 

Tilray Inc (NASDAQ:TLRY) recently sent an open letter to shareholders from Irwin D. Simon, Chairman and Chief Executive Officer. The letter detailed Mr. Simon’s strategic vision and $4B revenue plan for the Company and encourages all shareholders to vote for initiatives in support of that vision and plan at Tilray’s Special Meeting of Stockholders, which is scheduled to be held on September 10, 2021.

This follows the company’s landmark announcement earlier this month that it has acquired the majority of the outstanding senior secured convertible notes of MedMen that were originally held by certain funds affiliated with Gotham Green Partners, LLC and other funds. The acquisition provides Tilray with a path, subject to necessary regulatory approvals, to obtain a significant equity position in MedMen through conversion of the Notes and exercise of associated warrants following U.S. cannabis legalization (or Tilray’s waiver of such condition). In connection with the sale of the Notes, MedMen and GGP amended the restrictive covenants and extended the debt maturity to 2028 to provide MedMen the flexibility to execute on its growth priorities and explore additional strategic opportunities. In addition, MedMen separately announced today a significant equity investment from a private placement of MedMen Shares (as defined below) and warrants to a group of investors.

It will be interesting to see if the stock can break out of its recent sideways action. Over the past week, the stock is net flat, and looking for something new to spark things. Over the past month, shares of the stock have suffered from clear selling pressure, dropping by roughly -10%. 

Tilray Inc (NASDAQ:TLRY) managed to rope in revenues totaling $48M in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top line growth of -7.8%, as compared to year-ago data in comparable terms. In addition, the company has a strong balance sheet, with cash levels exceeding current liabilities ($416.4M against $284M).

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Published by Alan Masterson

Alan has over 25 years of trading experience in the U.S. equity markets. He began his career in finance working on a program trading desk specializing in over-the-counter stocks. His career progressed from that point to his current position as senior trader on an institutional trading desk. In the evenings, Alan teaches economics at a local community college. He has contributed articles to various publications over the last six years, including feature articles for an economics magazine and various financial blogs. You may contact Alan via his email (alanmasterson@wallstreetpr.com) or his Google+ page (https://plus.google.com/103338576216002376250).