Earnings season is heating up for the cannabis industry and the market is closely analyzing the numbers that are being reported by Canadian industry leaders.
Almost every company (cannabis and non-cannabis) has been negatively impacted by COVID-19. The virus has brought the global economy to a screeching halt and we are monitoring how we are able to respond to the crisis.
Although the cannabis sector has been under pressure so far this year, the recent trend has been slightly to the upside and we believe that there are several pockets of opportunity. The Canadian cannabis retail market is one of the verticals that we have been bullish on. When COVID-19 started to spread, the Canadian government declared cannabis to be an essential industry. The classification allowed many dispensaries to remain open and we are favorable on this development.
Depending on the location of the dispensary, businesses have been forced to abide by new regulations. In Ontario, consumers cannot enter a dispensary and must rely on curbside/pickup type of service. In Alberta, the regulations are not as strict and dispensaries are allowed to remain open. Many companies have limited the number of customers that are allowed to be inside at one-time and we are favorable on the proactive approach to help slow the spread of the virus.
Last week, we spoke with Choom Holdings (CHOO.CN) (CHOOF) CEO Chris Bogart and left the conversation with a much higher conviction level in the business. The Canadian cannabis retailer has been highly focused on the province of Alberta and we are favorable on the leverage that it has to this market. Choom also has retail operations in Ontario, and we will monitor how these locations have been impacted by the virus.
A Company with Catalysts for Growth
Choom is a business that has substantial catalysts for growth, and we are favorable on the planned expansion in British Columbia. The company will open a dispensary in a strategic location in Vancouver and we find this to be an important aspect of the story. The Choom dispensary will be located in Olympic Village and will be the only cannabis retail store to be located in the area.
In the back half of 2020, many economists and politicians expect the market to return to sense of normalcy. In a post-COVID world, we would not be surprised to see consumers do a majority of their shopping in the areas that are near their home. This trend could prove to be a catalyst for Choom as we expect to see a good portion of customers remain loyal to businesses that are located near them.
In a market like Alberta, which has not been as impacted by COVID-19 and is considerably smaller than Ontario and British Columbia (Vancouver), we do not expect to see a significant shift in how consumers spend. Alberta has remained a strong market for Choom and this is a trend that we expect to continue on a going forward basis.
During the last year, Choom has been nothing short of an execution story and has been expanding into new markets across Canada. From Niagara Falls to Vancouver, the Canadian cannabis retailer is focused on strategic markets and we find this to be an attractive aspect of the story.
When it comes to opening a dispensary, location is of the utmost importance and Choom is led by a management team that understands the importance of this. We believe the company is led by a management team that has its finger on the pulse of the Canadian cannabis retail market and are favorable on the long-term growth prospects that is associated with the operation.
An Under-appreciated Growth Story
At current levels, we believe that Choom has a compelling valuation and a favorable risk-reward profile. Although the company has been executing on previously announced initiatives, the recent trend has been to the downside and we believe that the market does not fully understand the opportunity.
One of the reasons we believe that Choom Holdings has been under pressure is due the relationship with Aurora Cannabis (ACB.TO) (ACB). The relationship was previously considered to be the most important aspect of the story, however, Aurora’s downfall has significantly devalued the relationship.
We believe that Choom Holdings has been overly impacted by the COVID-19 and is an opportunity that our readers need to be aware of. Over the long-term, we are favorable on the Canadian cannabis retail market and believe that Choom is positioned to survive the current market environment. The company is led by a management team that has been able to navigate the choppy waters of the Canadian cannabis market and we find this to be a key aspect of the story.
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