Rotten, horrible, atrocious. Take your pick of adjectives to describe the stock performances of Canadian cannabis producers last year. So far, 2022 isn't looking any better.
Two of the top Canadian companies, Sundial Growers (SNDL 4.89%) and Village Farms International (VFF 4.61%), have even seen their stocks sink more this year than they did in 2021. But there are reasons to expect brighter days might be ahead.
If so, which of these pot stocks is the better pick now? Here's how Sundial Growers and Village Farms stack up against each other.
The case for Sundial Growers
Let's first address the bad news for Sundial. The company continues to lose money, posting a net loss of 38 million in Canadian dollars in the first quarter of 2022. Its shares have fallen more than 25% year to date.
Sundial Growers CEO Zach George acknowledged in the company's Q1 conference call, "Cannabis equity valuations have been under extreme pressure." However, George noted that Sundial has outperformed global and Canadian cannabis stock indexes both over the past 12 months and on a year-to-date basis. He added, "We believe we are undervalued."
Despite its Q1 loss, Sundial's bottom line continues to move in the right direction. The company's top line looks good already. Net revenue soared 78% year over year in the first quarter to CA$17.6 million.
The revenue picture will get even better going forward. Sundial closed its acquisition of liquor store chain Alcanna on March 31, 2022. Only one day of Alcanna's revenue was included in Sundial's Q1 results. The Q1 total would have been close to CA$162 million if Alcanna had contributed throughout the quarter.
Sundial doesn't have any debt. Its cash stockpile totaled CA$1 billion at the end of March. Look for the company to buy back shares this year. Sundial should also be in a good position to make acquisitions of and investments in other cannabis producers as well.
The case for Village Farms
Village Farms has its fair share of bad news too. Skyrocketing inflation is causing significant problems for the company's produce business. Increased freight, labor, packaging, and supply costs combined to create an especially challenging environment.
Primarily because of these inflationary pressures on its produce operations, Village Farms reported a net loss of $6.5 million in the first quarter. The stock has plunged more than 50% so far this year.
But there's plenty of good news for Village Farms. Overall revenue jumped 34% year over year to $70.2 million. The company's cannabis business recorded its 14th consecutive quarter of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in Q1. Pure Sunfarms remains the top-selling dried cannabis flower brand in three important Canadian provinces -- Ontario, Alberta, and British Columbia.
Village Farms is picking up momentum in Quebec, another key province, thanks to its acquisition of Rose Lifescience. The company thinks that Rose now ranks in the top three for sales in Quebec and is well-positioned to keep expanding in the market.
Look for growth in international cannabis markets as well. Pure Sunfarms received GMP (Good Manufacturing Practices) certification in the European Union in Q1. It's now preparing to ship medical cannabis products to Europe and Israel later this year.
Village Farms' acquisition of Balanced Health Botanicals strengthens the company's U.S. presence. Balanced Health launched a hemp extract with Zesty Paws, a leading pet supplement brand, in the first quarter. This extract is now available in more than 1,000 PetSmart stores across the U.S.
Better pot stock?
My view is that Village Farms stands out as the better pot stock right now. The headwinds for the company's produce business should only be temporary. Village Farms is in a much stronger position to compete in international cannabis markets than Sundial is.
I also think that Village Farms is more attractively valued. Its shares trade at only 0.9 times sales. Sundial's price-to-sales ratio is a sky-high 17.6. Granted, that multiple will come down as the company integrates Alcanna. However, Village Farms will still be the cheaper of the two stocks.
Sure, Village Farms' stock performance has been rotten, horrible, and atrocious for a while now. But when the market environment improves, this pot stock could be among the biggest winners.
Editor's note: This article has been corrected. Village Farms reported a net loss of $6.5 million in the first quarter.