If you think oil and gas stocks have been hit hard in the past few weeks, take a look at marijuana stocks since March 31, 2019. In the past year and the change, most stocks cannabis have lost at least half of their value, with the losses being particularly noticeable for Canadian pot stocks.
Aurora Cannabis, the most popular headline of Robinhood, a millennium-centric online investment app, has lost about 91% since reaching its closing high of 2019 in mid-March 2019. HEXO (NYSE: HEXO) has retraced its steps by 93% since it reached its closing high in April 2019.
Despite the legalization of the recreational market, Canadian stocks of marijuana have been affected by a multitude of problems. Regulatory issues have delayed growing and growing licenses, while provincial licensing issues in Ontario, Canada’s most populous province, have created a bottleneck in the region.
Aside from regulatory concerns, Canadian pot stocks have struggled to access traditional forms of financing, often dragging around a mountain of goodwill linked to overpaid acquisitions and have more recently been affected by the spread of coronavirus disease 2019 (COVID-19). There is simply no escaping the onslaught of challenges.
And yet, four Canadian cannabis stocks appear to be on track to generate year-round profit in fiscal 2021. Naturally, profit estimates remain very fluid given the uncertainty associated with COVID-19 as well as the general malaise in the pot industry.
However, according to Wall Street, the following four Canadian cannabis stocks are on the fast track to showing investors green.
In my opinion, the least surprising company on this list is based in New Brunswick OrganiGram Holdings (NASDAQ: OGI). Among Canadian pot stocks, it is clearly the star. And according to Wall Street, the pace is increasing for earnings per share of 0.20 Canadian dollars in fiscal year 2021.
The most important factor in favor of OrganiGram is that it has chosen to focus on a single operational installation, avoiding the acquisition frenzy that has afflicted so many of its rivals. Having only one crop farm and one processing site allows OrganiGram to significantly adjust its operating costs and production to market conditions. It also doesn’t detract from the fact that the company’s three-tiered growth system should lead to yields per square foot two to three times the Canadian industry average for producers.
OrganiGram has also invested heavily in high margin derivatives. The company poured C $ 15 million into fully automated equipment capable of producing up to 4 million pounds of edible chocolate each year, and has developed an exclusive powder that can be added to beverages to speed up the onset of cannabinoids.
And one more thing: it is the only licensed Canadian producer that has generated quarterly operating profit without the help of one-time benefits or fair value adjustments.
Although not nearly as well known as OrganiGram among investors, the extraction service provider Valens (OTC: VLNCF) is another name that shouldn’t appear as a surprise on this list. Wall Street currently owns Valens for earnings per share of CA $ 0.41 in fiscal 2021.
The reason Valens is doing so well is that it is at the center of a major growth trend in Canada: derivatives. Derivatives, such as edibles, infused drinks, and topicals, generate much better margins than traditional dried cannabis flowers, making them must-haves for any licensed producer. But to produce these higher margin products, hemp and cannabis have to be processed to produce targeted resins, distillates, concentrates and cannabinoids. This is where Valens comes into play.
The beauty of Valens’ business model is that it is mainly based on contracts. This means that there is certainly a certain degree of cash flow since these contracts can last two or three years and have commitments of volume and price. Knowing his cash potential well in advance prevented Valens from spending too much on expanding the treatment.
Given that Valens has also recently launched into the production of white label infused drinks, it certainly seems ready to “deliver the green”.
Aside from OrganiGram, Aphria (NYSE: APHA) is the only other producer allowed to make a profit in fiscal 2021 – C $ 0.03 per share, according to Wall Street. However, Aphria’s ability to become profitable on a recurring basis is very different from that of OrganiGram.
For example, Aphria ended up bringing in C $ 120.6 million in revenue in the second fiscal quarter, suggesting that it was a “kick” and name taking. However, most of Aphria’s sales come from its subsidiary CC Pharma, which is a distributor of pharmaceutical drugs in Germany. Distribution revenues represented C $ 181.8 million of the C $ 246.7 million that Aphria generated during cumulative sales in fiscal 2020. The good news is that pharmaceutical distribution revenues are relatively constant . The bad news is that the margins associated with drug distribution tend to be very small.
On the cannabis side of the equation, Aphria is emerging as one of the best producers in the country in terms of peak production. Aphria only has three licensed facilities, but they are capable of producing up to 255,000 kilos of maximum annual production. Of course, Canada is nowhere near as much in need of marijuana – at least not yet.
With Ontario abandoning its ineffective lottery system for dispensing dispensary licenses, the hope is that additional retail openings in the province later this calendar year will boost sales of Aphria for adults. However, I’m not yet sold on Aphria growing in the green next year.
Finally, extraction service provider MediPharm Labs (OTC: MEDIF) is on track to generate annual earnings of C $ 0.12 in fiscal 2021, although the company’s earnings estimate for next year has more than halved in the past three months .
Like Valens, MediPharm relies on its role as a treatment intermediary to stimulate its growth. Many of the company’s treatment contracts last from 12 to 18 months and include a number of leading licensed producers.
It is also a business that took less than five months to turn on the lights to achieve recurring profitability. MediPharm’s peak processing potential is about half that of Valens, which, in my opinion, suggests that it will find it easier to control its operating expenses than its main treatment rival.
The biggest question mark at the moment concerns HEXO. Earlier this year, MediPharm sued HEXO for breach of contract for non-payment of C $ 9.8 million. In the long run, that C $ 9.8 million is peanuts – but that is not the case for a relatively new business that continues to grow its recurring revenues and tries to prove itself on Wall Street. With HEXO reducing production, cutting jobs and selling common stock to raise funds, it seems more likely that MediPharm could lose HEXO as a customer.
While the road to MediPharm is currently more bumpy than that of Valens, the two processors seem on track to generate profit next year.