If you think oil and gas stocks have had a rough go of things in recent weeks, take a gander at marijuana stocks since March 31, 2019. Over the past year and change, most cannabis stocks have lost at least half of their value, with the losses being especially noticeable for Canadian pot stocks.
Aurora Cannabis, the most popular stock on millennial-focused online investing app Robinhood, is down approximately 91% since hitting its 2019 closing high in mid-March 2019. Meanwhile, Quebec-based HEXO (HEXO) has retraced its steps 93% since it hit its closing high in April 2019.
Despite having a legalized recreational market, Canadian marijuana stocks have been hit by a plethora of problems. Regulatory issues have delayed the issuance of cultivation and sales licenses, while provincial licensing issues in Ontario, Canada's most-populous province, have created a supply bottleneck in the region.
Aside from regulatory concerns, Canadian pot stocks have struggled to access traditional forms of financing, are often lugging around a mountain of goodwill tied to overpaying for acquisitions, and have more recently been adversely affected by the spread of the coronavirus disease 2019 (COVID-19). There's simply been no escaping the onslaught of challenges.
And yet, four Canadian cannabis stocks appear to be on track to generate a full-year profit in fiscal 2021. Understandably, profit estimates remain highly fluid given the uncertainty associated with COVID-19 as well as the general malaise in the pot industry.
However, according to Wall Street, the following four Canadian cannabis stocks are on the fast track to showing investors the green.
In my opinion, the least surprising company on this list is New Brunswick-based OrganiGram Holdings (OGI 4.35%). Among Canadian pot stocks, it's the clear standout. And according to Wall Street, it's on pace for a per-share profit of 0.20 Canadian dollars in fiscal 2021.
The biggest factor working in OrganiGram's favor is that it chose to focus on a single operational facility, avoiding the acquisition binge that has plagued so many of its rivals. Having only one cultivation farm and processing site makes it considerably easier for OrganiGram to adjust its operating costs and production to match prevailing market conditions. It also doesn't hurt that the company's three-tiered growing system should lead to yields per square foot that are two to three times higher than the Canadian industry average for growers.
OrganiGram invested heavily in high-margin derivatives, too. The company sank CA$15 million into fully automated equipment capable of producing up to 4 million kilos of chocolate edibles each year, and it developed a proprietary powder that can be added to beverages to speed up the onset of cannabinoids taking effect.
And one last thing: It's the only Canadian licensed producer that's generated a quarterly operating profit without the aid of one-time benefits or fair-value adjustments.
While nowhere near as well-known as OrganiGram among investors, extraction-service provider Valens (VLNS) is another name that shouldn't appear as a surprise on this list. Wall Street currently has Valens pegged for a CA$0.41 per-share profit in fiscal 2021.
The reason Valens is doing so well is that it finds itself at the center of a major growth trend in Canada: derivatives. Derivatives, such as edibles, infused beverages, and topicals, generate much better margins than traditional dried cannabis flower, which makes them must-haves for any licensed producer. But in order to produce these higher-margin products, hemp and cannabis must be processed to yield resins, distillates, concentrates, and targeted cannabinoids. That's where Valens comes into play.
The beauty of Valens' business model is that it's predominantly based on contracts. This means there's some degree of certainly to its cash flow given that these contracts can be for two or three years in length and have set volume and price commitments. Knowing its cash-flow potential well in advance has kept Valens from overspending on processing expansion.
With Valens also recently moving into white label infused-beverage production, it certainly looks ready to "deliver the green."
Aside from OrganiGram, Aphria (APHA) is the only other licensed producer on track to generate a profit in fiscal 2021 -- CA$0.03 per share, according to Wall Street. However, Aphria's ability to become profitable on a recurring basis is very different than OrganiGram's.
For instance, Aphria wound up reporting CA$120.6 million in fiscal second-quarter revenue, which would make it appear that it's "kicking bud" and taking names. However, most of Aphria's sales are generated from its CC Pharma subsidiary, which is a pharmaceutical drug distributor in Germany. Distribution revenue has accounted for CA$181.8 million of the CA$246.7 million Aphria has generated in fiscal 2020 year-to-date sales. The good news is that pharmaceutical distribution revenue is relatively consistent. The bad news is that margins associated with drug distribution tend to be very small.
On the cannabis side of the equation, Aphria projects as one of the nation's top growers by peak production. Aphria only has three licensed facilities, but they're capable of up to 255,000 kilos of maximum annual output. Of course, Canada is nowhere near needing that much marijuana -- at least not yet.
With Ontario abandoning its ineffective lottery system for assigning dispensary licenses, the hope is that additional retail openings in the province later this calendar year will boost Aphria's adult-use sales. However, I'm not yet sold on Aphria pushing into the green next year.
Lastly, extraction-service provider MediPharm Labs (MEDIF -3.45%) is on track to generate CA$0.12 in full-year profit in fiscal 2021, albeit the company's profit estimate for next year has been more than halved over the past three months.
Similar to Valens, MediPharm is counting on its role as a processing middleman to drive its growth. Many of the company's processing contracts range from 12 to 18 months in length, and they feature a number of prominent licensed producers.
This is also a company that took less than five months from turning on the lights to pushing into recurring profitability. MediPharm's peak processing potential is about half that of Valens, which, in my view, suggests it'll have an easier time controlling its operating expenses than its prime processing rival.
The biggest question mark right now has to do with HEXO. Earlier this year, MediPharm sued HEXO for breach of contract for failure to pay CA$9.8 million. In the long run, this CA$9.8 million is peanuts -- yet not so for a relatively new company that's still building its recurring revenue stream and trying to prove itself to Wall Street. With HEXO scaling back its output, cutting jobs, and selling its common stock to raise cash, it's looking likelier that MediPharm may lose HEXO as a customer.
While the road for MediPharm is currently bumpier than that of Valens, both processors appear on track to generate a profit next year.