From a revenue and cash flow standpoint, 2020 has been a banner year for the Canadian cannabis industry and we believe that the industry is reaching an inflection point.
Based on the monthly revenue numbers that are reported by Health Canada, consumers are purchasing considerably more cannabis from legal operators in 2020 when compared to 2019. Although the size of the Canadian cannabis market has more than doubled in less than one-year, public cannabis companies have been under considerable pressure and this is a trend that our readers need to be aware of.
During the last year, the landscape of the Canadian and the international cannabis markets have changed. Canada’s recreational market did not ramp up as expected and we believe that the slower-than-expected growth can be attributed to Health Canada. International markets also have not lived up to expectations (the EU, South America, and Africa to be specific) and many cannabis producers have shut down operations in these markets.
In 2017 and 2018, Canadian cannabis producers were raising capital like it was growing on trees and were acquiring businesses for massive premiums. Fast forward to today and many of the companies that were acquired are defunct and have been written off by the purchaser. These write downs have put additional pressure on Canadian cannabis companies and we expect this trend to continue for the foreseeable future.
Although most Canadian cannabis companies have lost more than half of their value since 2019, we believe that fundamentals are improving on average. As companies go out of business, new opportunities are created for the operators that survive and we are favorable on this. Going forward, we believe there are a few pockets of opportunity that are under-appreciated and want to highlight 3 opportunities to be aware of as earnings season starts to heat up.
MediPharm: An Undervalued Long-Term Growth Story
MediPharm Labs (LABS.TO) (MEDIF) is a leading Canadian cannabis company that is highly levered to the cannabis oil market. The company operates a state-of-the-art EU GMP facility that allows it to capitalize on both the domestic and the international cannabis markets.
During the last year, MediPharm has come under considerable pressure and we believe that the market is missing out on the opportunity. Earlier this month, Canaccord Genuity resumed coverage on MediPharm with a Speculative Buy rating and a $2.25 price target. The price target implies that MediPharm has more than 100% upside to current levels and we find this to be significant.
Last month, Altacorp an PI Financial lowered their price targets on MediPharm to $2.15 and $1.75, respectively. At these lower price targets, there still is substantial upside to the current share price, and we believe that our readers need to be aware of this. Going forward, MediPharm has significant potential catalysts for growth and we believe that it has a favorable risk-reward profile.
HEXO: Is a Reverse Stock Split in the Cards?
During the last month, HEXO Corporation (HEXO.TO) (HEXO) has reported a number of substantial developments and there has been renewed attention in the business. After the Canadian cannabis producer announced a supply agreement with leading Israeli cannabis company, we have seen increased interest in the opportunity and continue to monitor it from the sidelines.
Last month, HEXO received two upgrades from broker-dealers that raised their price target on it. Cormark Securities and Jeffries assigned the Canadian cannabis producer a $1.25 and $0.75 price target, respectively, and this represented an important development for the business.
HEXO has come well off its June highs and we continue to monitor the opportunity from the sidelines. If the share price does not rise above the $1 level, we expect to see the company announce a reverse stock split in order to remain listed on the New York Stock Exchange (NYSE). We would not be surprised to see HEXO follow in the footsteps of Aurora Cannabis (ACB.TO) (ACB) which we will highlight next.
Aurora Cannabis: Where does it go From Here?
2020 has been a challenging year for Aurora Cannabis (ACB.TO) (ACB) and the road ahead will not get any easier for the company. After spending several years of time and hundreds of millions of dollars to construct massive cultivation facilities in Canada and abroad, the company shut down the facilities due to a lack of demand for cannabis in these markets.
Aurora Cannabis is the perfect example of a company that expanded too far, too fast and the stock has been paying the price for it. Following the completion of a reverse split and the acquisition of a US CBD company, broker-dealers raised their price targets on the Canadian cannabis company, and this is a trend that caught our attention.
One of the surprising aspects of the price targets that have been assigned to Aurora Cannabis is related to how far off they are from each other. For example, Canaccord has a $21 price target on the company while CIBC has a $14 price target on it. We find this to be a cautionary sign for Aurora Cannabis since analysts cannot seem to make up their mind on what it is worth. Going forward the name of the game for the company is execution and this is a story that we will continue to closely follow.
If you are interested in learning more about these Canadian cannabis operators, please send an email to email@example.com to learn more.