While the big cannabis players’ results are underwhelming, we take a look at other promising Cannabis stocks, such as World High Life (NEX: LIFE) and GreenStar Biosciences Corp. (CSE: GSTR)
Legal marijuana is currently one of the fastest-growing industries in the world and is likely to remain so for the foreseeable future. With license sales more than tripling from $3.4 billion to $10.9 billion between 2014 and 2018, Wall Street expects annual global sales of up to $200 billion by the end of the next decade. If these figures prove correct, we are talking about an average annual growth rate of more than 27% through 2030.
There is no doubt that cannabis stocks have the potential to offer investors good to very good returns. But at the same time, investors must keep in mind that not all marijuana stocks will be winners or justify their high valuations. There are three cannabis stocks that we are skeptical about. At the same time, we would take a look at lesser-known companies that have the potential of becoming much more recognizable in the cannabis sector.
Canopy Growth for Cannabis stocks
Although Canopy Growth is the largest cannabis share in the world by market capitalization and the company has a lot of money at its disposal, we would leave the share on the sidelines for several reasons.
For several quarters now, Canopy Growth’s biggest problem has been an aggressive investment by the company. Canopy Growth is more than well-financed after a Constellation Brands investment and is busy making acquisitions and entering new markets. They are spending $150 million to build a hemp processing plant in New York State and is also acquiring Acreage Holdings, which was valued at $3.4 billion at the April announcement.
Unfortunately, these expenses will make it virtually impossible for the company to become profitable in the near future. Currently, it is not even certain that Canopy Growth will be able to generate a recurring profit by 2022.
Canopy Growth is also without visionary Co-CEO Bruce Linton, who was dismissed by the board in early July. Mark Zekulin, who has assumed the role of CEO for the time being, will also step down as soon as the Board of Directors has found a permanent CEO solution.
The final straw was last quarter’s results. This was 15% at the industry low and the goodwill of CAD 1.93 billion reported on its balance sheet could lead to a future impairment. Although it is the largest cannabis stock, Canopy’s current valuation is far from meaningful.
Of all the markets where a type of legal cannabis is sold (either medical or over-the-counter), the USA is the leader. Although cannabis is not yet legal at the federal level, it is there that most sales take place. This should make pharmacy operators a particularly attractive idea for investors. A vertically integrated company in this market is MedMen Enterprises – and we wouldn’t want anything to do with the share at all.
Don’t get us wrong, we think the MedMen approach is actually good. This is a company that generally appeals to the slightly wealthier customer and wants to normalize the process of buying marijuana. The problem is that MedMen is deep in the red.
In the first nine months of fiscal 2019, MedMen lost USD 178.4 million from operations. Even with significantly reduced selling and administrative costs, MedMen can hardly reduce its operating losses.
To make matters worse, the company is currently taking over the privately held PharmaCann. This is an all-stock deal, which would further dilute the existing shares. The inclusion of PharmaCann will cause additional expenses at a time when, in our opinion, MedMen’s costs are already out of control.
It is not until 2021 at the earliest that there is a chance of profitability.
In the end, we have the cannabis grower Cronos Group, whom we would tend to avoid as well.
Cronos Group is one of the largest marijuana stocks by market capitalization. Cronos received a $1.8 billion equity stake from Altria in March, which allows it to spend quite a lot of expansion and acquisitions. Given the additional focus on high-margin derivatives, one would think that Cronos Group is an appropriate long-term hold. But there are many problems here.
On the one hand, Cronos Group is well behind the competition in terms of production. Of course, the company is more focused on cannabinoids than on pure marijuana production. But that doesn’t excuse the fact that it’s not even able to be in the top 10 in terms of production or saleability, which is really incomprehensible given the high market capitalization.
Cronos Group has also been harmed by the concerns surrounding vaping. The alliance with Altria was mainly forged because everyone was sure that vaping would be the next big thing. But then 530 cases of mysterious lung diseases became known that were registered by the Centers for Disease Control and Prevention in the USA. These have been associated with vaping, and this could mean dramatic sales losses.
Also, Cronos Group, like the other companies here, is far from being able to be operationally profitable in the near future. If you take a closer look at the figures, you will see that Cronos Group is still a long way from profitability. Here, too, we prefer to invest elsewhere.
Players away from the spotlight
It is worth taking a look at other cannabis and hemp players who are not as much in the center of attention but have the potential of becoming great.
World High Life PLC (NEX: LIFE), listed on London’s stock exchange, is an investment company that is planning on being a part of the growing medicinal cannabis and CBD market in Europe, which is estimated to reach 58 billion euro by 2029. The company is building a portfolio of promising European companies and recently has proposed a deal in which it would buy all shares of Love Hemp, the UK’s leading CBD company, valued at 9 million GBP.
Love Hemp sells CBD products, such as oils, sprays, vapes, a variety of edibles, CBD infused beverages, and cosmetics, in 1200 high street stores and network stores of Boots, Superdrug, Tesco and Sainsbury’s. Together with Love Hemp, World High Life is planning to enter the German market in 2020 and then expand to other European markets.
Another investment company that is looking beyond borders in their strategy is GreenStar Biosciences Corp. (CSE: GSTR). Having gained experience in the Canadian cannabis market, the company aims at having a significant presence in the American market.
GreenStar has made the first step by acquiring a tenant partner company, Cowlitz, a Washington state-based producer and distributor of high-quality cannabis products. Cowlitz is a leader in the market as they produce their products cheaper than the competitors while maintaining high product quality. They grew significantly with GreenStar’s support within just five years of operations, recording over $14 million in revenue in 2018.
GreenStar’s other successful partnership with Progressive Herbs Inc. (Capri) provided them with a profitable asset. Capri is an exclusive owner of a license for Progressive Herbs’ proprietary cultivation technology which allows to harvest high-quality cannabis faster and with fewer resources than other producers in the market.
While big cannabis stocks have not been doing well on the stock market, investment companies like World High Life and GreenStar Biosciences Corp. already bring results. It is worth to take interest in companies that are not big names yet but have a shot at becoming key players in the cannabis and CBD sector in the near future.