For years, marijuana stocks have been virtually unstoppable, and investors who had the stomach and wherewithal to stick with the still-nascent industry were handsomely rewarded.
However, the past six months have not been kind to cannabis stocks. Since the end of March, and through the previous weekend, the Horizons Marijuana Life Sciences ETF, the first exchange-traded fund to focus on cannabis, had declined by 35% -- and that includes dividend payouts.
To many, this decline in marijuana stocks was long overdue. After all, no next-big-thing investment simply shoots through the roof without experiencing growing pains. Right now, the North American pot industry is contending with its fair share of hiccups, and it's brought previously lofty investor expectations back to Earth.
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Then again, the recent decline in marijuana stocks has also created an opportunity for long-term investors to nab direct and ancillary cannabis players at attractive price points.
In recent months, I've highlighted why vertically integrated dispensary operators Trulieve Cannabis and Planet 13 Holdings were buys, and tackled the extraction-services space with MediPharm Labs. As we look forward to October, it's finally time to dig into the Canadian growing space after a long downtrend. Ladies and gentlemen, let me introduce you to Flowr Corp. (FLWPF), which is my top marijuana stock to buy in October.
Here's why Flowr has been shellacked in recent months
Between the third week of June and the third week of September, Flowr's share price essentially declined by 60%. Before I tackle why it's such an intriguing bargain, let's first go over some of the reasons why its share price has been decimated of late.
First of all, there are clear supply concerns throughout Canada that are impacting all companies. Health Canada has been bogged down by cultivation, processing, and sales license applications, and despite introducing fixes to its enormous backlog, it'll be a while before many of these applications are given the green light. To boot, individual provinces have also been slow to approve or open physical dispensaries, which has led to a substantial shortage of cannabis products.
Although these supply issues haven't had a major impact on Flowr's dried cannabis sales, they will most certainly affect the upcoming launch of derivative products in mid-December. Derivatives are non-dried-flower products, such as edibles, beverages, vapes, concentrates, and topicals. Thus, there's clear concern that sales estimates for all Canadian marijuana producers, including Flowr, are a bit high (pardon the pun).
Image source: Nasdaq.
Another reason investors aren't thrilled has to do with Flowr getting approved for listing on the Nasdaq exchange and then subsequently pulling plans to make the move from the over-the-counter (OTC) exchange. Volume and visibility are considerably better on the Nasdaq than the OTC exchange, which probably has some investors shaking their heads. My guess is the company's declining share price had something to do with the decision.
Like most pot stocks, Flowr has also needed to raise capital to complete its capacity expansion projects, as well as for acquisitions. Without easy access to non-dilutive forms of financing, Flowr has often turned to selling common stock as a means of raising capital. While effective, issuing stock typically dilutes existing shareholders. Flowr has certainly been guilty of the latter in recent months.
I also suspect Wall Street has concerns about whether or not Flowr is going to stand out in a very crowded field of growers. Without incredible marketing or business partners, competing against the likes of Canopy Growth could prove difficult.
Finally, Flowr has been a late-bloomer (again, pardon the pun). The company's most recent quarterly report featured net revenue of only 2.18 million Canadian dollars and roughly 460 kilos of production. By comparison, Aurora Cannabis generated more than 29,000 kilos of output as Canada's largest producer in its most recent quarter.
That takes care of the housekeeping. Now, let's dive into the particulars of why Flowr is a buy right now.
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Five reasons you should consider adding Flowr right now
There aren't one or two reason why small-cap grower Flowr stand out. There are, in fact, five reasons that make this grower the one to add now.
To begin with, Flowr's production isn't like most of its peers. Whereas most Canadian pot growers are yielding discount to average quality marijuana, Flowr's Kelowna facility in British Columbia is focused on producing premium and ultra-premium quality cannabis. Comparatively, there's very little supply competition for premium dried flower relative to discount and average quality weed. This should result in significantly better pricing power for Flowr. It's worth noting that while most growers have witnessed their per-gram price for dried cannabis fall, Flowr's has held up well.
Next up is the fact that Flowr is actually a major producer – you just may not know it yet. In addition to the 50,000 kilos of premium and ultra-premium cannabis that'll be produced each year in Kelowna when at peak capacity, Flowr recently completed the cash-and-stock acquisition of Holigen and its flagship Aljustrel outdoor grow farm in Portugal. When fully operational, Aljustrel's 7-million-square-foot outdoor farm is capable of 500,000 kilos of annual output. But what might be even more important than the company's sheer production potential is Aljustrel's location in Portugal. This acquisition easily allows Flowr to reach Europe's burgeoning medical marijuana markets.
As someone who follows the marijuana industry closely, I'm also a big fan of production quality over quantity. Simply put, you're not going to find a pot grower that has a more impressive yield per square foot. Already working with Scotts Miracle-Gro subsidiary Hawthorne Gardening, Flowr forecasts 300 grams of output per square foot at Kelowna in 2019. Comparatively, most growers tend to produce between 75 grams per square foot and 125 grams per square foot. Flowr's top-notch growing efficiency, along with its niche premium output, are a great combination for the company's margins.
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Fourthly, despite being a major producer that could top 550,000 kilos of annual output (including more than 330,000 square feet of combined greenhouse and outdoor-grow space adjacent to Kelowna that I've yet to mention), Flowr's costs are generally centralized. In other words, everything the company has ongoing is at Kelwona or in Portugal. That compares to major growers like Aurora Cannabis that have 15 separate growing facilities. By centralizing its costs, Flowr has yet another means of improving its margins.
Lastly, while subjective, I feel that you'd struggle to find a more intriguing fundamental value in Canada than Flowr. Right now, Flowr is valued at only three times Wall Street's consensus 2020 sales. Mind you, this figure hasn't been updated to reflect the acquisition of Holigen. Meanwhile, most of the brand-name Canadian pot stocks are trading at sales multiples that are double or triple that of Flowr.
Investors should understand that this turnaround play isn't going to flip the switch overnight. But patient investors who give Flowr a good three to five years to prove its worth should be handsomely rewarded.
