Between the beginning of 2016 and the end of the first quarter of 2019, cannabis stocks could not be stopped. Investors who had the wherewithal, and stomach, to buy into the weed industry were handsomely rewarded.
But the past six-plus months have been nothing short of brutal for cannabis stock investors. For example, the Horizons Marijuana Life Sciences ETF, the first exchange-traded fund focused on cannabis, has lost more than half of its value since mid-March. Meanwhile, most brand-name pot stocks are down 50% or more.
While there are viable reasons for this substantive pullback in cannabis stocks, it could also be argued that this downward move has created an intriguing value proposition for a handful of names. The following three marijuana stocks might very well be considered "buy-the-dip" candidates.
Image source: Getty Images.
OrganiGram Holdings
While debatable, there may not be a more exciting value in the marijuana space following the industry's precipitous six-plus-month decline than OrganiGram Holdings (OGI -2.07%). Since OrganiGram made its debut on the Nasdaq exchange in May, its shares have retreated by more than 55%.
The thesis here is simple and similar across the entire Canadian growing space. Our neighbor to the north is contending with supply issues that aren't going away overnight. Regulatory agency Health Canada has been buried under a backlog of cultivation and sales licensing applications, which is keeping product off the market. By the same token, a number of key provinces have slow-stepped the rollout of physical dispensaries. The end result is a much slower ramp-up of recreational weed sales in Canada than expected.
What makes OrganiGram so intriguing are its numerous operational advantages. For one, it's the only major grower (i.e., peak production north of 100,000 kilos a year) based in an eastern Atlantic province. Calling New Brunswick home means that OrganiGram has easy access to other eastern Canadian provinces, which happen to offer a higher cannabis usage rate than the national average.
However, it's also important to note that OrganiGram has access to all 10 of Canada's provinces. It's one of only four growers with supply deals in every province.
Maybe my favorite thing about OrganiGram is its efficiency. Since the company is only operating a single grow site at Moncton, and it's utilizing a three-tiered growing system at that site, the 113,000 kilos of peak output expected should translate to around 230 grams of yield per square foot. For comparison, most of OrganiGram's major peers are likely around 100 grams per square foot in yield.
This is a grower that has all the tools needed to be the first to recurring profitability in Canada.
Image source: Getty Images.
Valens GroWorks
An ancillary industry that has me really excited is extraction services. By "extraction services," I mean third-party contractors that take cannabis and hemp biomass and yield resins, distillates, concentrates, and/or targeted cannabinoids for their clients. These providers may also offer white-label manufacturing and packaging services. And the name that I'm eyeing following recent industry weakness is Valens GroWorks (VLNS).
Valens has lost close to a third of its value in just over three months' time, and it's a bit of a head-scratcher to figure out why. Aside from industrywide pessimism, the best guess I can venture is that there's serious concern vape-related health issues in the U.S. could curb demand for derivatives throughout North America.
But there are three important facts investors should understand about Valens GroWorks and extraction services. The first of those is that extraction services aren't just tied to vaping. These resins, distillates, and so on are needed for all types of alternative consumption options. And since derivative pot products bear much juicier margins than traditional dried flower, the need for Valens' services is only going to grow.
Secondly, the contracts Valens GroWorks signs make its cash flow highly predictable. This is a company that landed a two-year extraction services deal with HEXO for an aggregate of 80,000 kilos, and has an amended extraction agreement with Tilray totaling 60,000 kilos annually. In an industry with little predictability, extraction provider Valens brings some level of consistent expectations to the table.
And third, Valens' recently reported third-quarter operating results featured a profit. Despite being a relatively nascent segment, extraction providers have quickly ramped up their operations and are beginning to see results. For Valens, it meant 87% sequential revenue growth and net income of $5.9 million.
Image source: Getty Images.
Charlotte's Web
A final buy-the-dip candidate to consider is hemp-based cannabidiol (CBD) products manufacturer Charlotte's Web (CWBHF -3.48%). CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits. Since the early part of August, shares of Charlotte's Web have retraced 42%, as of this past weekend.
Aside from concerns that the U.S. federal government has no intention of rescheduling or descheduling cannabis, which has whacked the entire U.S. pot industry, the specific issue that's hurt Charlotte's Web of late looks to be the likelihood of the U.S. Food and Drug Administration (FDA) cracking down on CBD product manufacturers. The FDA has yet to issue formal guidelines on CBD as an additive to food and beverages, which has a lot of CBD stocks on edge. And since Charlotte's Web is the leader in U.S. CBD market share, it's clearly dealing with the brunt of this skepticism.
However, the other side of the coin here is that, since cannabis is liable to remain illicit at the federal level for some time, hemp-based CBD is the smart and safe way to get in on the green rush in the United States. Hemp is considerably easier and cheaper to grow than cannabis, and it's rich in CBD, making it the perfect crop to process for high-margin derivative production.
Even though the U.S. CBD market is incredibly diverse, Charlotte's Web currently finds itself at the head of the pack. Since the year began, the company has seen its retail door count more than double from 3,680 to over 8,000. Significant wins have included a 1,350-store topical products deal with Kroger in 22 states, as well as a 738-store deal with Vitamin Shoppe spanning 45 states for its new CBD-infused gummy line. With Charlotte's Web upping its hemp planting to 862 acres this year from just 300 acres in 2018, it's pretty evident that the demand for CBD products is strong.
The true selling point, though, is that Charlotte's Web is already profitable on an operating basis, and those profits are only bound to get stronger over the next couple of years. For impatient investors who don't want to wait for cannabis stocks to turn the corner to profitability, Charlotte's Web is the green-rush stock to consider.
