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3 Undervalued Cannabis Stocks With Impressive Earnings Growth

Sep 13, 2019 • 10:55 AM GMT+0000
9 MIN READ  •  By Anthony Varrell
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The 2019 summer season has been especially tough for the Canadian cannabis sector and we continue to closely monitor this burgeoning market.

During the last month, several leading Canadian Licensed Producers (LPs) have reported quarterly financial results that show impressive growth when compared to that in the prior quarter. The opening of the Canadian recreational cannabis market is quickly proving to be a major revenue driver for companies that are levered to this side of the market and we expect this trend to become more significant after Health Canada expands on the types of products that can be sold to recreational consumers (i.e. cannabis concentrates, cannabis infused products, and vape pens).

When looking at the amount of revenue that these products have been generating in legal cannabis markets in the US, there is a lot to be excited about. Today, we have highlighted three Canadian LPs that recently reported quarterly financial results and are well positioned to benefit from a change in the product mix that can be offered to consumers.

WeedMD: A Leading Canadian LP That Is Trading At A Discount

Last week, we highlighted WeedMD (WMD.V) (WDDMF) after the Canadian LP recorded incredible growth during the second quarter. This is a company that we have been excited about due to the focus on increasing production capacity (indoor and outdoor). When compared to the prior quarter, revenues increased by 139% and WeedMD recorded $12 million of net income.

If you look at the way WeedMD’s production capacity increased on a quarter-over-quarter basis, you will see that this a company that is focused on growth. During the second quarter, the Canadian LP sold 1,979 kilograms of dried cannabis, a 150% increase over the previous quarter. Going forward, we expect to see the amount of cannabis sold by WeedMD to continue to increase after Health Canada granted the company a license amendment in late August that more than doubled its greenhouse production space. We are bullish on the amount of revenue that can be generated by the expanded footprint and believe that the market does not fully appreciate this.

The growth reflected in WeedMD’s second quarter financial results is impressive and definitely caught our attention. From the outdoor cultivation opportunity to the cannabis concentrate opportunity via CX Industries (the company’s wholly owned subsidiary), WeedMD has attractive revenue streams and we expect to see revenues ramp higher as a result of these high-growth initiatives. We have been bullish on the cannabis concentrate market for quite some time and expect this vertical to prove to be a major value driver over the long term.

When compared to its peers, WeedMD is trading at a considerable discount and we expect this to change in the near future. The company is executing on several major growth initiatives that are focused on increasing the production capacity of cannabis flower and cannabis concentrates. As a result of these initiatives, we expect to see revenues ramp significantly higher in the fourth quarter and find the risk-reward scenario to be attractive at current levels.

WeedMD represents a multi-faceted growth story that has several potential catalysts for growth. We believe that the market does not associate much value to the outdoor operation, and we find this to be significant. Going forward, the increased production capacity will play a key role in the success of the cannabis concentrates business and we are bullish on the amount of revenue that can be generated through this initiative. We believe that WeedMD is in the middle of a major transition and this is an opportunity to be watching.

Aleafia Health: Benefitting from the Acquisition of Emblem

Another Canadian LP that has benefited from the legalization of recreational cannabis is Aleafia Health Inc. (ALEF.TO) (ALEAF) and this is an opportunity that we have been excited about. Earlier this year, the company completed the acquisition of Emblem, a Canadian cannabis producer, and this transaction has quickly proved to be accretive for the entire business.

Last month, Aleafia Health released second quarter financial results that showed strong growth and generated approx. $4 million of revenue (a company record) during the period. This amount of revenue represents an increase of 159% over the prior quarter with the increase was primarily fueled by the sale of recreational cannabis in Canada as well as an increase in clinic revenue.

From the cultivation of cannabis to the cannabis clinic opportunity, Aleafia Health has significantly benefited from the acquisition of Emblem and we are bullish on this aspect of the story. When it comes to the cannabis clinic opportunity, the company recorded a 43% increase in revenue over the prior quarter and has seen more than 65,000 clinic patients to date. When it comes to the cannabis cultivation opportunity, the growth has been even more significant. When the second quarter came to a close on June 30th, Emblem Cannabis had 6,959 active registered medical cannabis patients. As of August 13th, the company had more than 8,500 patients and we are favorable on the amount of revenue that can be generated as a result of this increase.

During the quarter, Aleafia Health recorded a significant reduction in overall expenditures which is a continued business priority for the company and was driven by operational synergies associated with the Emblem acquisition. Going forward, we expect Aleafia Health to continue to find synergies between the businesses as production capacity continues to increase. We are favorable on this aspect of the story and the amount of value that can be created between the two businesses.

One of the important developments reported during the quarter is related to the strength of Aleafia Health’s balance sheet following the completion of a $40+ million strategic financing. With the proceeds from the financing, the Canadian LP is well positioned to capitalize on strategic growth opportunities, and we expect to see that capital put to work to advance the business.

Going forward, we expect the recreational market to continue to be the most significant revenue driver and believe that the market underappreciates this aspect of the story. We also believe that the market underappreciates Aleafia Health’s leverage to the international side of the cannabis industry and expect this aspect of the business to prove to be a major value driver in 2020 and beyond.

During the second quarter, Aleafia Health successfully secured export and import permits allowing for its first international product shipment to be distributed by CannaPacific. The company owns 10% of CannaPacific which has been highly focused on increasing production capacity to capture additional market share in Australia. Through Emblem, Aleafia Health has attractive leverage to the German medical cannabis market via a joint venture with Acnos Pharma GmbH, a well-established German pharmaceutical wholesaler and logistics company.

The growth prospects associated with these two international medical cannabis markets are significant and we will monitor how Aleafia Health is able to advance this side of the business over the next year. Although the market appears to underappreciate this aspect of the story, we believe that the international side of the business will play a key role in the success of the business over the long-term.

When looking at Aleafia Health, we see a company that is levered to some of the most attractive verticals of the cannabis industry. We believe that the market does not associate much value with the company’s outdoor cultivation operation and find that this opportunity is flying under the radar. During the last month, Aleafia Health has come off its highs and we believe that this is an opportunity to be watching.

Aphria: Trending Lower Following a Strong Earnings Report

Aphria (APHA.TO) (APHA) started the month of August on a positive note and recorded more than $128 million (CAD) of revenue during the fourth quarter. When these financial results were reported, the announcement served as a catalyst for the entire cannabis sector and the market responded favorably to these numbers.

Following this impressive earnings report, the Canadian LP has been under pressure and has come well off its early August highs. Going forward, we believe that Aphria has significant growth prospects and expect to see the company continue to record strong growth. The increase in revenue was primarily driven by the opening of the recreational cannabis market and we believe this is a trend that will continue.

The last twelve months have been a roller coaster for Aphria shareholders, and this is an opportunity that we continue to be excited about. The Canadian LP is highly focused on the international cannabis opportunity as it is levered to several strategic international markets in South America, Australia, and Europe.

During the last month, we have been laser focused on Aphria and continue to closely follow the Canadian LP. The recent decline has been significant, and momentum has been trending lower. Now that the month of August has come to a close, we have Aphria on our radar and this is an opportunity to keep an eye on.

 

 

Pursuant to an agreement between StoneBridge Partners LLC and Aleafia Health Inc. (ALEF) we have been hired for a period of 90 days beginning August 15, 2019 and ending November 15, 2019 to publicly disseminate information about (ALEF) including on the Website and other media including Facebook and Twitter. We are being paid $8,000 per month (ALEF) for or were paid “ZERO” shares of unrestricted or restricted common shares. We own zero shares of (ALEF), which we purchased in the open market. We plan to sell the “ZERO” shares of (ALEF) that we hold during the time the Website and/or Facebook and Twitter Information recommends that investors or visitors to the website purchase without further notice to you. We may buy or sell additional shares of (ALEF) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.

Pursuant to an agreement between StoneBridge Partners LLC and WeedMD Inc. we have been hired for a period of 180 days beginning April 22, 2019 and ending October 22, 2019 to publicly disseminate information about (WMD) including on the Website and other media including Facebook and Twitter. We are being paid $6,000 per month (WMD) for or were paid “ZERO” shares of unrestricted or restricted common shares. We own zero (0) shares of (WMD), which we purchased in the open market. We plan to sell the “ZERO” shares of (WMD) that we hold during the time the Website and/or Facebook and Twitter Information recommends that investors or visitors to the website purchase without further notice to you. We may buy or sell additional shares of (WMD) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.

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Authored By

Anthony Varrell

Anthony Varrell is Managing Director of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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