To put things plainly, this has not been a good year for cannabis stocks. It began promisingly, with more than a dozen pot stocks gaining in excess of 70% during the first quarter. However, the wheels fell off the wagon soon thereafter, with most marijuana stocks proving to be buzzkills for investors in 2019. Among the roughly four dozen pot stocks I follow where cannabis is the predominant source of revenue, a mere nine are currently up for the year. Of the remainder, most are down by a double-digit percentage.
Throughout 2019, marijuana stocks were hit with a flurry of problems. In Canada, supply issues took their toll on the legal market. Meanwhile, in recreationally legal U.S. states like California, high tax rates were a clear problem. In both instances, we've seen the black market thrive while legal-channel cannabis struggles. This has, as noted, resulted in a poor performance for marijuana stocks in 2019.
However, a few companies have bucked the trend... in a big way. Among the aforementioned nine pot stocks that have moved higher this year, three have at least doubled in value, through Monday, Dec. 9. In descending order, here are the cannabis industry's top performers, with just three weeks to go before year's end.
MediPharm Labs: Up 112%
While investors are quick to flock to well-known Canadian growers like Canopy Growth and Aurora Cannabis, it's cannabis and hemp extraction-services provider MediPharm Labs (MEDIF 0.57%), which was assuredly off most folks' radars when the year began, leading the pack. Even after pulling back more than 50% from its highs set in August, MediPharm Labs is still up 112% for the year.
What makes extraction-service providers like MediPharm so special is that they'll be at the center of the derivatives growth phase for years to come. Derivatives are alternative forms of consumption, such as edibles, vapes, topicals, tinctures, concentrates, and infused beverages, and they're about to hit Canadian dispensary shelves any day now. These are significantly higher-margin pot products than traditional dried cannabis flower, and they rely on extracts, resins, distillates, or targeted cannabinoids provided by companies like MediPharm Labs to be produced.
Throughout the year, MediPharm has been able to secure extraction-service and white-label deals as a third-party provider. This means it'll be paid a fee to provide some sort of agreed-upon extract, or handle the formulation and manufacturing of certain tinctures, for its clients. The best part is that these deals are often 18 to 36 months in length, which provides some predictability to cash flow in an otherwise unpredictable industry.
The icing on the cake that has cemented MediPharm as the top performer in 2019 is the company's operating statements. Despite having only started its extraction operations in November 2018, the company just delivered its second consecutive quarterly profit. And make no mistake about it, this is the no-nonsense operating profit variety that doesn't need the assistance of one-time benefits or fair-value adjustments to be called a profit. MediPharm is certainly a name you'll want on your radar moving forward.
Valens GroWorks: Up 106%
I don't mean to sound like a broken record, but have I praised the extraction-service industry enough? I only ask because Valens GroWorks (VLNS), the second-best performer on a year-to-date basis, is also a Canadian cannabis and hemp extraction company.
The variables that are influencing MediPharm are pretty much exactly the same for Valens, with a slight twist. You see, whereas MediPharm's extraction capacity is eventually being worked up to account for 500,000 kilos of hemp and cannabis biomass per year, Valens GroWorks is on track to eventually hit 1 million kilos of processing capacity. Thus, Valens is really hoping that the demand for high-margin derivatives is off the charts.
The company certainly received a nice boost in 2019 from two major deal signings. In April, Valens and Quebec-based HEXO announced a two-year extraction agreement for a total of 80,000 kilos of cannabis and hemp biomass. Valens will provide HEXO with resins and distillates that'll be used for derivative production. Then, in June, Valens and Tilray amended an existing agreement that quadrupled Tilray's commitment to 60,000 kilos of hemp and cannabis biomass per year. Valens has demonstrated that it's having little issue landing big-name contracts.
Most importantly, this demand has shown up on the company's income statements. Just like MediPharm, Valens GroWorks has been generating no-nonsense operating profits. In the three months ended in August, the company generated 16.5 million Canadian dollars in sales, and CA$5.5 million in operating income after cost of goods and recurring operating expenses were subtracted. With profits so hard to come by in the Canadian cannabis space, it's no surprise Valens has been so popular among investors.
Village Farms International: Up 101%
The only other pot stock that managed a triple-digit gain in 2019 (that isn't an extraction-services provider) is Village Farms International (VFF 0.41%). British Columbia-based Village Farms has gained 101% this year, although that's more than 60% off its year-to-date high.
Why the optimism, you ask? For one, Village Farms wound up moving from the over-the-counter (OTC) exchange to the Nasdaq exchange on Feb. 21. Uplisting from the OTC exchange to either of the United States' major exchanges is viewed as a sign of industry maturation. Not to mention, it opens Village Farms up to additional Wall Street coverage and investment.
Secondly, the company's three-decade background in the vegetable-growing business has allowed it to make a seamless transition to growing cannabis in British Columbia. The joint venture known as Pure Sunfarms, formed with Emerald Health Therapeutics in 2017, retrofit one of Village Farms' 1.1-million-square-foot greenhouses (Delta 3) and is currently operating at full run-rate output of 75,000 kilos of marijuana per year. A second, adjacent greenhouse (Delta 2) acquired from Village Farms will also be operating at full run-rate capacity of 75,000 kilos by the end of 2020.
Investors have also been pleased with the company's push into the U.S. hemp industry. According to its latest operating results, Village Farms has harvested 625 acres of roughly 870 acres of planted hemp in the U.S. in 2019. Hemp biomass can be sold and processed for cannabidiol (CBD), the nonpsychoactive cannabinoid best-known for its perceived medical benefits.
Even though Village Farms has leaned on fair-value adjustments to boost its income in 2019, it's pretty clear that Wall Street is pleased with the company's all-around progress.