Over the past 12 months, cannabis stocks have seen significant losses. With many of the largest names in the industry reporting significant quarterly losses and failing to become profitable, it's not surprising that some investors have become reticent about investing in the marijuana industry at this time. On top of downward pressure on the sector, the broader market has fallen substantially as a result of coronavirus fears.
While there are many overvalued pot stocks that aren't worth buying right now, there are also a few companies that are remarkably undervalued. In fact, not only do these same undervalued companies often have tremendous growth potential, but some of them are even reporting a profit!
Here are a couple of cannabis companies that fit this description and investors should consider investing in them.
Image source: Getty Images.
1. Aphria
Aphria (APHA) is one of the cheapest large-cap pot stocks on the market right now. While other companies, such as Aurora Cannabis, Tilray, and Canopy Growth all trade at price-to-sales (P/S) ratios of 6.6, 10.2, and 22.4 respectively, Aphria trades at a measly 2.7 times its sales.
Most of the time when a company is trading at an incredibly cheap valuation, there's a good reason behind it. Whether that be a poor financial quarter or some other news development, it's not normal for a perfectly sound company to be trading much cheaper than its competition.
Aphria's case is interesting. Ever since the company's management got caught up in a major scandal surrounding its Latin American acquisitions in December 2018, investor trust in the company evaporated. Despite undergoing major changes to its leadership team, Aphria's reputation has remained tarnished since the incident.
This is unfortunate, as Aphria has proven to be one of the only profitable pot stocks on the market, with the company reporting a positive net income more than once in 2019. Although its recent fiscal second-quarter 2020 results (leading up to Nov. 30) saw a net loss of CA$7.9 million, over a six-month period, Aphria is still in the green with a net income of CA$9.0 million.
When looking deeper at Aphria's revenue figures, its Canadian pot business isn't the main source of the company's sales. Instead, Aphria owns a German distribution subsidiary called CC Pharma, which brought in around CA$86.4 million in revenue in comparison to the CA$39.7 million seen in Canada.
| Name | Market cap | Total quarterly revenue | Quarterly Canadian revenue | Quarterly CC Pharma revenue | Quarterly net income (loss) | Price- to- sales ratio (P/S) |
|---|---|---|---|---|---|---|
| Aphria | $1.29 billion | $126.1 million | $39.7 million | $86.4 million | ($7.9 million) | 2.7 |
Data source: YCharts, Aphria. All figures in CA$0.
While sales for CC Pharma have been strong, all signs suggest that they are only going to increase from here on out. Aphria is the only cannabis company licensed to grow all three approved strains of medical marijuana in Germany, having received a fifth cultivation license in the country in May 2019. The company also announced in January 2020 that it received a certification to ship medical cannabis across the EU as well.
Overall, prospects for Aphria remain very positive. With plenty of growth potential, a track record of profitability, and trading at a rock-bottom valuation, there's a very compelling case to be made for Aphria as an investment opportunity right now.
2. Village Farms International
Village Farms International (VFF 7.32%) is a small-cap cannabis producer with an interesting history. The company first started off as a vegetable grower, but as Village Farms struggled with the low margins and growth potential that's often the case with the produce market, the company transitioned to growing marijuana instead.
Village Farms entered into a joint venture with Emerald Health Therapeutics (EMHT.F) in 2017 to create a low-cost, highly efficient cultivation operation known as Pure Sunfarms. The resulting agreement, combining Village Farms' expertise with Emerald Health's financing, has created an extraordinarily cost-efficient grow operation.
Image source: Getty Images.
This efficiency has borne fruit in the company's financial statements, with Village Farms managing to report a profit for three out of the past four quarters. While its most recent third-quarter 2019 results showed a surprising net loss of $5.1 million, the rest of 2019 raked in $12.5 million in net profit.
Considering how rare it is for a pot stock to be profitable, it's a major feather in Village Farms' cap that it's been able to do so for the most part. Despite this, the company is trading at an incredibly cheap valuation, just 1.3 times its P/S ratio.
The answer might not be Village Farms' fault as much as it is due to its partner's problems. Emerald Health appears to be struggling to raise cash to fund its operations as well as its share of the Pure Sunfarms joint venture. In October, Emerald Health announced it was laying off a third of its workforce to cut costs.
In addition, it appears that Emerald Health's financial woes resulted in the company failing to purchase 40% of Pure Sunfarms production as per the joint venture agreement. In response, Village Farms international has expressed interest in buying out at least a portion of Emerald Health's share in Pure Sunfarms. This seems like a good move for Village Farms, especially since it seems like its association with the apparently struggling Emerald Health is what's dragging down its valuation at the moment.
Despite this issue, Village Farms itself is in a strong position to continue growing. Just recently, the company announced that it has begun supplying Alberta, Canada's second-largest cannabis market, with marijuana. Given how small Village Farms is -- its market cap is just $280 million -- this deal could be a major revenue source for the company.
While small-cap pot stocks tend to be riskier, Village Farms' impressive track record of profitability alongside its dirt-cheap valuation makes it a compelling stock to buy today.
