2020 has not lived up to expectations for the global cannabis industry and much of the blame can be attributed to COVID-19. Going forward, we believe that the industry is poised to record growth as lockdown orders start to get lifted in provinces across Canada and in the European Union (EU).
In the US, the cannabis industry showed strong resilience in the first half of 2020 with many state markets having recorded higher cannabis sales in March and April (when compared to the same period last year). When compared to Canada and the EU, the US is in a more precarious situation with the number of COVID cases surging in states such as Arizona, California, and Florida.
We believe that the cannabis industry is reaching an inflection point and expect to see a divergence in the performance of businesses that are levered to the sector. Going forward, we expect to see companies that are well capitalized and that are based in strategic markets to outperform their peers. Today, we have highlighted 5 cannabis companies that we are closely following and believe that our readers need, to be keeping an eye on these opportunities.
Scotts Miracle-Gro: A Leading Ancillary Cannabis Company
Scotts Miracle-Gro (NYSE:SMG) is probably the most appealing cannabis stock for broker-dealers and institutional investors and believe that the business is well positioned to record strong growth in the back half of 2020.
The reason why Scotts is appealing to these large investors and funds is due to the structure of the business. The company does not touch the cannabis plant and is considered to be an ancillary business. Although Scotts is not directly involved in the growing, processing, distributing, or selling cannabis, it plays an important role in the supply chain and sells a variety of products that allow for the cultivation, production, and distribution of cannabis to the public.
Scotts has proven to be a beneficiary of COVID-19 and our readers need to be aware of this. In early June, the company revised estimates that showed better-than-expected revenue and earnings guidance. The revision was based on higher demand in both its US consumer and Hawthorne segments.
Scotts reported that its U.S. consumer segment is expected to grow by 9% to 11% in fiscal 2020, which is up from its previous forecast of only 1% to 3% sales growth. For its Hawthorne segment, the company now expects sales growth of 45% to 50% in fiscal 2020 after previously guiding for a 30% to 35% increase.
Hawthorne represents an exciting growth vertical for Scotts and we are favorable on how the management team has been able to grow the business. A few years ago, the company acquired Hawthorne and the vertical now accounts for approx. 17% of Scotts’ total revenue. Over the next year, we expect Hawthorne to record impressive growth and are bullish on this aspect of the story.
So far this year, Scotts has been a strong performer with the shares up more than 25% during this time. Following the decision to raise guidance, the company has received a series of upgrades and price target increases from leading broker dealers and this is a trend that we are favorable on. We believe that Scotts has visible catalysts for growth and is an opportunity that we will continue to closely follow.
GW Pharmaceuticals: A Biotech Growth Story
For several years, GW Pharmaceuticals plc (GWPH) has been considered to be a bellwether of the cannabis sector. During the last year, the biotech cannabis company has recorded impressive revenue growth after the launch of Epidiolex in the US and this is a trend that is expected to continue.
When it comes to the biotech side of the cannabis industry, GW is second to no one and is considered to be the industry leader by leaps and bounds. The company has a deep pipeline of products that are in advanced stages of FDA clinical trials and has substantial potential catalysts for growth.
So far this year, GW has been a strong performer on the Nasdaq and is up more than 20% during this time. During the last quarter, the biotech cannabis company has received a series of upgrades and price target increases from leading broker dealers and the shares are trading well below the average price target of these banks.
In the most recent quarter, GW generated more than $100 million of revenue and recorded impressive growth over the prior quarter. As the company works to bring new products to market, we expect the business to record incremental revenue growth and this is an opportunity to have on your radar.
Canopy Growth Corporation: A Turnaround Story in the Making
Last year, Canopy Growth Corporation (WEED.TO) (CGC) was considered to be the leading player in the Canadian and in the global cannabis market. A lot has changed in the last year and the company is working to optimize the business through strategic growth projects and cost cutting initiatives.
In 2019, Canopy Growth announced the firing of Bruce Linton as its CEO and Chairman. The change in the management team has not gone smoothly and the market did not respond favorably to the announcement.
Following the firing of Bruce, Canopy Growth announced the closure of several cultivation facilities and recorded a $743 million impairment charge in the fourth quarter. These developments represent a major change in strategy for the cannabis producer and we will monitor how it benefits the business over the long-term.
During the last few months, several broker-dealers downgraded and lowered price targets on Canopy Growth and we find this to be of significance. In the most recent quarter, Canopy Growth recorded a $1.3 billion net loss and this number was much higher than what analysts were forecasting.
Although the last few months have been challenging for the Canadian cannabis producer, the business has a bright future. With almost $2 billion of cash on the balance sheet, Canopy Growth is well positioned to survive a prolonged downturn and this is an opportunity that we will continue to closely monitor.
Will HEXO Conduct a Reverse Split or be Delisted from the NYSE?
HEXO Corporation (HEXO.TO) (HEXO) is a Canadian cannabis producer that has not been able to live up to expectations and is an opportunity that we are cautious with. So far this year, the market has responded negatively to the evolution of the business and we are not surprised by the decline.
A few years ago, HEXO made headlines when it announced a strategic partnership with Molson Coors Beverage Company to focus on the cannabis beverage opportunity. The market became very excited about HEXO after the formation of the partnership and the company was able to raise a lot of capital to support growth initiatives.
Unfortunately, it took several years for the partnership to make a meaningful announcement and the market became negative on the opportunity after the lack of execution. The last year has been a whirlwind for the HEXO which recently announced plans to shut down several facilities that it operates in Ontario.
Last year, HEXO executed on a strategy to acquire Newstrike Brands for a massive premium and this transaction left us very cautious with the operation. The Ontario facilities that were closed were once operated by Newstrike and the shutting down of the facilities did not come as a surprise to us.
The last few months have been very volatile for the Canadian cannabis producer and the shares are trading well below the $1 level on the New York Stock Exchange (NYSE). If HEXO does not conduct a reverse split (like Aurora Cannabis did), it will most likely be delisted from the exchange and this is an opportunity that we continue monitor from the sidelines
Aurora Cannabis: Cutting Costs and Expanding into the US CBD Market
A few weeks ago, Aurora Cannabis Inc. (ACB.TO) (ACB) issued a progress update on its business transformation plan that included a number of operational developments that caught our attention. Like Canopy Growth, the Canadian cannabis producer has been in the middle of a transformation that is highly focused on cutting costs and improving efficiencies.
As part of the transformation, Aurora Cannabis has undertaken a strategic realignment of its operations to protect its position as a leader in key cannabis markets. Through this initiative, the company expects to generate positive cash flow and for its gross margins to significantly improve.
When the progress update was announced, Aurora Cannabis reported to have initiated a plan to close operations at five facilities over the next two quarters in order to focus production and manufacturing at its larger scale and highly efficient sites. During the last few months, Aurora Cannabis has executed on a cost reduction strategy that has had a material impact on the business. After these cuts, the company expects to have a run-rate of approximately $42 million and to be able to support significantly higher levels of revenue.
In late May, Aurora Cannabis announced the acquisition of Reliva, a leader in the sale of hemp-derived CBD products in the US. Under the terms of the agreement, Reliva will receive approximately $40 million of common shares from Aurora Cannabis. The transaction includes a potential earn-out that is structured to align risk and reward between Aurora shareholders and Reliva management to focus on continued strong operational and financial execution. Aurora expects the transaction to be immediately accretive on an Adjusted EBITDA basis and we will monitor how the acquisition supports the growth of the business.
Going forward, the name of the game for Aurora Cannabis is execution and we will monitor how the management team is able to drive the story forward. So far this year, there has been a lot of turnover with the management team and we will keep an eye on how the story evolves from here.