The cannabis sector got a big boost in the last few weeks as governments around Canada and the U.S. confirmed most cannabis stores as essential. While most stores are closing outside of grocery stores, cannabis dispensaries were deemed essential due to their medical cannabis component.
Despite early indications of strong demand for cannabis, most of the stocks trade near the recent multi-year lows due to fears the coronavirus outbreak eventually does damage demand. Already, some states are seeing the initial surges in demand wane as businesses were deemed essential, thereby reducing the need to rush into stores during this crisis. Consumers were clearly loading pantries for a long shutdown at home.
The obvious negative ramifications for the cannabis sector are tighter credit dynamics potentially forcing weak players out of the sector. The cannabis sector in the U.S. was already struggling with access to reasonable financing options so this extended economic shutdown further benefits the bigger public players with stronger balance sheets and more access to capital.
Despite solid indications that cannabis operations are one of the few sectors not impacted by the global economic shutdown, all of the stocks are far off the yearly highs. The opportunity here is to find some stocks not appreciated for their long-term staying power while realizing that provinces and states can always close retail stores similar to the decision in Ontario to close dispensaries for a two-week period.
We’ve delved into these three companies with positive outlooks for a strong March quarter and catalysts for higher stock prices in 2020. Using TipRanks’ Stock Comparison tool, we lined up the three alongside each other to get the lowdown on what the near-term holds for these cannabis players.
AYR Strategies (AYRSF)
A relatively unknown MSO in the U.S. is Ayr Strategies with operations in Massachusetts and Nevada. The stock is down over 70% from the 52-week highs despite impressive quarterly numbers.
The stock has a market cap of only $95 million while the company guided to 2020 revenues of $217 million. Ayr Strategies does rely heavily on Nevada dispensaries where a substantial decline in tourist traffic could greatly hit stores with impressive annual revenues of $17 million each prior to the coronavirus outbreak.
The U.S. MSO generated Q4 revenues of $32.1 million and an adjusted EBITDA of $9.2 million. The company guided to 2020 EBITDA of nearly $100 million providing substantial ability to weather any protracted economic storm that actually impacts the cannabis sector.
Below $6, the stock is a bargain with consensus revenue estimates for 2021 up at $286 million. Right now, the stock trades at nearly half the current 2021 sales estimates showing the market doesn’t appreciate the potential in the U.S. MSO.
Overall, AYR Strategies is a Wall Street favorite, earning one of the best analyst consensus ratings in the market. TipRanks analytics exhibit the stock as a Strong Buy. Out of 4 analysts tracked in the last 3 months, 3 are bullish while 1 remains sidelined. With a return potential of 162%, the stock’s consensus target price stands at $13.23.
Village Farms (VFF)
Another underappreciated cannabis play is Village Farms International. The produce company entered the Canadian cannabis market via a joint venture with Emerald Health Therapeutics called Pure Sunfarms.
Despite some ownership hiccups, the venture has been successful in turning produce greenhouses into cannabis operations with the joint venture generating $62.3 million in sales last year. Pure Sunfarms has been very profitable with 76% gross margins and EBITDA of $40.7 million for the year.
Recently, the company has seen a dip in revenues due to the tough wholesale market, but wisely Pure Sunfarms has already shifted production to branded sales and has generated the top market share position on the Ontario Cannabis Store. In addition, the company is launching Cannabis 2.0 products along with the now launched branded products in Alberta, British Columbia and Ontario to cover most of the Canadian market outside of Quebec.
Village Farms' market valuation stands at ~$160 million, while revenue could reach $150 million in 2020, according to consensus estimates. Furthermore, once the FDA relaxes restrictions on hemp-infused CBD in food products, Village Farms has the ability to quickly ramp up growing operations throughout the U.S, including greenhouses in Texas.
The stock only trades at $2.90 after trading above $6.25 back in just January while cannabis sales in Canada only continue to grow.
Indeed, every single analyst who's voiced an opinion on the cannabis producer over the past year says this stock is a "buy." On average, analysts who track Village Farms predict the stock will rise more than 18% from its current price to race past $43 per share within the next 12 months. And that makes the stock a "strong buy."
Acreage Holdings (ACRGF)
The obvious choice for an underappreciated stock in a tough operating environment is Acreage Holdings. The company had become one of the weaker multi-state operators (MSOs) in the U.S. due to already having a deal with Canopy Growth (CGC) to be acquired at a much higher price.
For now, Acreage has 32 operational dispensaries in 13 states with licenses for 88 dispensaries. The company recently opened a dispensary in Florida and has access to other very promising markets.
The biggest issue with this MSO is the adjusted EBITDA losses requiring the recent financing transactions. While Acreage appeared somewhat sleepy after the big buyout, the company is now aggressively moving into states like Illinois, Florida, Massachusetts and Michigan to solidify the business in the meantime.
Analysts have the company generating sales of up to $405 million in 2021 making the stock more appealing here with ways to win, if the Canopy Growth deal never closes. Acreage is cutting costs and recently furloughed employees to reduce costs during the Covid-19 pandemic with a focus on turning EBITDA profitable this year. The market value is down to only $140 million while the sales are expected to more than double the market cap.
Considering the Canopy Growth deal is in stock when the company is legally allowed to trigger the acquisition, the reduced risk helps an investment in Acreage. With Canopy Growth trading at $14, the deal offers shareholders a value of $8.15 with a 0.5818 share conversion. At this point, shareholders should win with or without Canopy Growth.
Based on all the above factors, Wall Street analysts are thoroughly impressed with Acreage. With 4 Buy ratings and 1 single hold, the messege is clear: Acreage is a Strong Buy. If this wasn’t enough, the $9.51 average price target implies that shares could surge 491% in the next twelve months.