Here are three junior cannabis stocks recommended by analysts as ‘buys’. They serve a mix of medical and recreational marijuana markets for their products.
Indus Holdings Inc. (CNSX—INDS)
Beacon Securities analyst Doug Cooper says Indus Holdings Inc. has a huge head start in its industry by operating in California, as it is by far the single, largest state in the US by population and by cannabis sales.
Investor concerns about California being “a difficult place to do business” are misplaced and seen through a non-survivorship bias. “No California-focused public company has performed well, ergo it is a difficult place to do business. However, we believe the poor operational track records of other companies are based on their own issues such as poor management and bad balance sheets as opposed to more California macro issues,” says Mr. Cooper.
“Investor concerns about single state operators should not apply to California. If single state operators were only focused on Vermont with a population of 600,000 for example, we would agree. However, California’s population is almost the same as the next six largest adult-use states combined. California is also the natural home for growers given the excellent growing conditions if and when cannabis is federally legalized and inter-state barriers fall,” comments the analyst.
As a result of investor concerns, Mr. Cooper says California is extremely under-invested and under-capitalized, especially versus other major adult-use cannabis states. “This has created a plethora of small ‘mom and pop’ growers who lack the scale necessary to succeed in the industry and thus are likely not profitable.
This situation creates an incredible roll-up opportunity for a well-capitalized, well-managed company such as Indus, which is already one of the state’s largest growers with 220,000 square feet and owns the state’s number six selling flower brand. Such a roll-up is aided by the fact that no other major cannabis company is focused on California, indicating acquisitions should be reasonably priced and very accretive,” says the analyst.
Mr. Cooper maintains his ‘Buy’ recommendation on the shares of Indus. He says his upward bias comes from the potential for better-than-expected results from its greenhouse as well as accretive merger and acquisitions activities.
Delta 9 Cannabis Inc. (TSX—DN)
Delta 9 Cannabis Inc. reported solid-enough second-quarter 2020 results for Toronto-based Mackie Research analyst Greg McLeish to reiterate his ‘Buy’ recommendation on this healthcare stock. Net revenue was $13 million, which was higher than his $11.7-million estimate.
However, his primary reasoning for the earnings beat was due to an unrealized gain from changes in the fair value of its biological assets. The latter, valued at $2.8 million, helped steer net income to $1.4 million (or $0.01 a share), which was ahead of the analyst’s net loss forecast of -$900,000 (or -$0.01 a share), despite increased general sales costs related to health and safety measures to insulate the business from COVID-19 government mandates.
Delta 9, renowned for being one of Canada’s only vertically-integrated cannabis companies licensed for production, processing, distribution and retail operation, is looking into supply agreements for both Ontario and Newfoundland & Labrador, thus blossoming further than its home base of Manitoba and shifting the value of its inventory upwards.
The company anticipates that the current 297 licensed Grow Pods will have an annual production capacity of approximately 8,325 kilograms of dried cannabis per year. Delta 9 anticipates it will ultimately have up to 420 of its grow pod cultivation systems under licence as a part of its Phase 2 expansion that would potentially increase the overall capacity to 11,975 kilograms a year and 25,000 kilograms a year of dried flower once its new processing centre begins processing (no date given yet).
To enter the Cannabis 2.0 era (of legalized cannabis derivatives), Delta 9 is currently working through its subsidiary Westleaf Labs LP to develop a line of vaporized cannabis oil products, to include vaporizable oil cartridges.
Green Thumb Industries Inc. (CNSX—GTII)
Green Thumb has secured US$25 million for the construction of a cultivation facility in Ohio, and opened its first adult-use dispensary in Illinois.
“We view this development positively, as it sets the company up for expansion in a market with significant growth potential,” says Toronto-based Beacon Securities analyst Russell Stanley.
The company owns the state maximum of five dispensaries in Ohio out of its 57 licensed locations, giving the company a strong retail footprint. The addition of a cultivation facility will complete Green Thumb’s vertical integration in this market, Mr. Stanley notes.
Ohio is the seventh-largest state in the US. The analyst points out that although Ohio’s medical market was slow out of the gate, its annualized medical cannabis sales have improved 113 per cent from US$120 million in early January to more than US$250 million in mid-August.
Green Thumb also announced the grand opening of its existing Illinois location for adult-use on Oct. 8. Naperville city council originally banned adult-use activity in September 2019, but residents voted in favour of allowing adult-use operations via a referendum in March.
The city government has capped the total number of dispensaries within city limits at three, and Green Thumb will be the first to open.
“We view the development positively,” says Mr. Stanley. “Legal market sales in Illinois are up 300 per cent year-to-date with the opening of the adult-use market in January, and are now tracking at a more than US$1.1-billion run rate.”
Green Thumb Industries owns cannabis cultivation, production and retail operations in the United States. The company generates revenue in 12 states. Its assets include 13 manufacturing facilities and 52 operating dispensaries.
This is an edited version of an article that was originally published for subscribers in the November 2020/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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