Legal marijuana projects as one of the fastest-growing industries in the world over the next decade. Regardless of which Wall Street forecast you favor, growth prospects suggest a healthy double-digit compound annual growth rate for the industry through 2030, and hopefully plenty of opportunity for investors to make some green while cannabis companies sell the green.
Unfortunately, there wasn't much green made in August. Following a month where a mere nine pot stocks rose in July, August fared little better, with only 10 marijuana stocks ending in the green. Comparatively, 48 of the 58 direct and ancillary players I follow moved lower last month, with 34 shedding at least 10% of their value, not including rounding. Put another way, almost 3 out of 5 pot stocks lost 10% or more last month.
For many of these cannabis stocks, there are viable reasons for this decline -- namely, they and the industry have a lot of growing up to do. Persistent supply issues in Canada, high tax rates in the U.S. on legal weed, and resilient black markets throughout North America are making life difficult for pot stocks.
Yet, three of these double-digit percentage losers last month look like truly intriguing bargains. Despite being clobbered, these marijuana stocks are climbing the ranks as being particularly attractive.
Despite relatively nothing in the way of news, Atlantic-based grower OrganiGram Holdings (OGI 4.69%) was taken to the woodshed in August, losing 30% of its value. Since touching an intraday high of $8.44 on May 21, the day it officially uplisted from the over-the-counter (OTC) exchange to the Nasdaq, OrganiGram has lost half of its value, through this past weekend.
The problems plaguing OrganiGram are pretty consistent throughout the industry. In particular:
- Health Canada has been slow to approve cultivation and sales licenses;
- Individual provinces have been slow to approve licenses for physical retail stores; and
- The launch of derivative cannabis products, such as edibles and beverages, was delayed by a couple of months, to mid-December, when October was initially seen as the target date.
However, OrganiGram has a lot working in its favor. It has the geographic advantage of being the only major grower located in the Atlantic region of Canada. Based in New Brunswick, the company should have an easy path to significant market share in the less-populated Eastern provinces of Canada. Although, keep in mind that these less-populated Atlantic provinces have shown the highest adult-use rates for cannabis in Canada.
To build on this point, OrganiGram is also one of just a handful of growers to have supply deals in place with all 10 provinces. Thus, it has the geographic advantage of being located in the Atlantic, but it still has access to all major markets.
Most important, OrganiGram is a leader in production efficiency. Management projects 113,000 kilos of peak annual output, which works out to more than 230 grams per square foot, based on the cultivation space at its Moncton campus. With most major growers likely producing between 75 grams per square foot and 125 grams per square foot, OrganiGram is more or less doubling up its peers. Investors can thank the company's unique three-tiered growing system for its superior efficiency.
My suspicion is that OrganiGram will be one of the first pot stocks to be profitable on an operating basis, without the aid of a bunch of one-time benefits and fair-value adjustments.
Speaking of clobbered, British Columbia-based Flowr Corp. (FLWPF) was nearly the worst performer last month, with a decline of more than 39%.
Flowr's woes in August look to be traced primarily to a capital raise. On Aug. 8, the company completed a 43.5 million Canadian dollar equity financing that involved the sale of 10.61 million shares of common stock and one-half of one common share warrant with each share. While this capital was needed to complete the company's acquisition of Holigen and fund ongoing corporate expansion, marijuana investors are growing weary of the constant dilution they're contending with, and this capital raise looks to be no exception.
It's also worth noting that Flowr decided to forgo its uplisting to the Nasdaq for the time being, which will keep it relegated to the more volatile and lower-volume OTC exchange.
Nevertheless, this niche company could offer an intriguing value for long-term investors at these levels. That's because unlike other growers, Flowr's focus at the Kelowna campus is on premium and ultra-premium dried flower and derivatives. There's very little competition for considerably higher-grade weed, making for strong pricing power and, presumably, much higher margins. And, as the icing on the cake, Flowr's utilization of genetics, and its partnership with Scotts Miracle-Gro's subsidiary Hawthorne Gardening, has pushed yield to an industry best 300 grams per square foot at its Kelowna campus.
Flowr also recently closed on the aforementioned acquisition of Holigen. Holigen's Aljustrel outdoor grow farm in Portugal spans 7 million square feet and offers up to 500,000 kilos of annual output. While outdoor-grown cannabis won't meet the same premium standards seen in Kelowna, it represents the perfect means to convert this cannabis output into high-margin derivatives for the burgeoning European medical marijuana market.
Flowr's performance has been dismal of late, but it offers differentiation that could allow it to stand out over the long run.
A third pot stock that was taken to the woodshed without a lot of negative news last month was Florida-based, vertically integrated dispensary operator Trulieve Cannabis (TCNNF 0.04%). Shareholders of Trulieve watched as 25% of their stock's value disappeared in August.
Aside from general market malaise toward the cannabis industry, my best explanation for Trulieve's weakness has to do with tempering expectations that something positive will happen for the pot industry at the federal level in the U.S. anytime soon. It's become pretty obvious that Senate Majority Leader Mitch McConnell (R-Ky.) isn't going to allow anything cannabis related to reach the Senate floor for a vote, meaning any sort of broad-based legalization or reform could be many years away.
Of course, this hasn't stopped Trulieve from being an early stage success story. Although the company is a multistate operator with a presence in California, Massachusetts, and Connecticut, it's Truelieve's focus on its home market of Florida that's really paying dividends. By opening 30 stores in the Sunshine State, Trulieve has been able to really establish its brand while keeping its operating expenses reasonable. The result has been strong operating profitability for numerous quarters.
Having stuck with its operating forecast in its most recent quarter, Trulieve Cannabis is on pace to potentially quadruple its sales and adjusted EBITDA between 2018 and 2020. This would mean up to $400 million in sales in 2020, or close to two times its current market cap. With the company also pushing into California, the largest market by annual sales, Trulieve looks intriguing as the marijuana stock with the lowest current forward price-to-earnings ratio.