Vancouver-based PI Financial Corp. analysts Bob Gibson, Jason Zandberg and Devin Schilling recently teamed up to review their most recent list of ‘top stock picks’ for Investor’s Digest of Canada. Small-to-mid-cap consumer stocks are the flavour of the moment.
Our consumer goods stocks coverage is primarily focused on small-to-mid-cap stocks that we expect to deliver growing cash flow, supported by appropriate capital structures.
Stable economic growth remains a key underlying factor supporting positive returns from our covered companies. Statistics Canada’s survey of retail sales for July, 2018 saw a 3.6 per cent year-over-year gain, in line with June’s year-over-year gain of 3.7 per cent. The big mover was gasoline stations, up 20.2 per cent.
We won’t see a similar pickup next quarter, as gas station sales rose through August and September and have been relatively flat in 2018. Beer, wine and liquor stores continue to show some growth, up 3.5 per cent. We’ll see if the legalization of recreational cannabis negatively impacts this number. Specialty food stores (up 5.5 per cent) continued to outperform grocery (up 0.8 per cent). This could benefit GreenSpace Brands Inc. (TSXV—JTR).
Used car sales are outperforming new car sales, up 10.5 per cent versus up 1.2 per cent. Most will need financing, which works in AXIS Auto Finance Inc.’s (TSXV—AXIS) favour. The implementation of tariffs by various countries against the US could benefit Canadian companies. Tariffs imposed on American whiskey could benefit Corby Spirit and Wine Ltd. (TSX—CSW.A).
Fortunately, the US imposing tariffs on a number of fish products processed in China will be a big benefit to High Liner Foods Inc. (TSX—HLF). The US Centers for Medicaid and Medicare Services (CMS) began to move away from a fee-for-service model toward a value based purchasing model. This was designed to make healthcare stocks focus more on efficient patient care that would reduce hospital re-admissions. We believe this move will benefit those service providers that can help with early diagnoses, like Akumin Inc. (TSX—AKU.U).
Cannabis stocks still lead the parade
But PI Financial’s ‘top pick’ is Alcanna Inc. (TSX—CLIQ). Alcanna was the top performer of our consumer products stocks, up 17.6 per cent. It beat the Consumer Discretionary index (down 8.4 per cent) and the Consumer Staples Index (down 2.7 per cent). The stock traded in the $9 to $10 range until the latter half of September when excitement over cannabis retailing finally took hold.
Management have said they want to open the maximum number of stores allowed in Alberta (37) and Ontario as well.
Alcanna’s market capitalization is about $360 million, so investors are getting all of Alcanna’s liquor business and its $24.7 million of operating margin for $85 million or 3.4 times earnings.
The next two years will bring about a lot of change, including accelerated Alberta store renovations, the launch of a retail cannabis business, a new discount banner (Deep Discount Liquor) and a new ERP (enterprise resource plan) system. For 2018, revenue of $624 million is expected, while adjusted operating profit should come in at $24.7 million. In 2019, we are forecasting revenue of $798.8 million and adjusted operating profit of $40.4 million.
iAnthus aims for new US markets
Another ‘top pick’ cannabis stock is iAnthus Capital Holdings Inc. (CNX—IAN). We have chosen iAnthus as our fourth-quarter ‘top pick’ as the company is on track for dispensary roll-out across the US in 2018. IAN currently owns five cultivation facilities and has licenses to operate up to 39 dispensaries.
Significant catalysts such as new recreational markets (New York for example) and regulation easements will further propel iAnthus’ revenue growth. iAnthus is set to capitalize on first-mover advantage.
Management has been actively pursuing US cannabis businesses as a public company since September 2016, giving them an early mover advantage and making them one of the most seasoned groups in the public markets.
As the state of Massachusetts began an adult-use cannabis program in July 2018, IAN moved rapidly and has opened its first flagship dispensary in Boston under the Mayflower banner.
We forecast revenue of $3.1 million, $54.3 million and $141 million, respectively, for fiscal 2018, fiscal 2019, and fiscal 2020. We estimate EBITDA of -$9.2 million, $9.1 million, and $37.6 million for fiscal 2018, fiscal 2019, and fiscal 2020 respectively.
And more yet to come
In anticipation of the legalization of recreational cannabis, a number of companies that want to become cannabis retailers have gone public and/or raised equity. They cannot open a store until after legalization, so estimating sales and earnings is challenging. Any money raised will be used for store fixtures and inventory.
Solo Growth, trading as Aldershot Resources Ltd. (TSXV—ALZ) and backed by Canopy Rivers (TSXV—RIV), wants to roll out cannabis retail in Alberta and Ontario. It has a fully diluted market cap of approximately $275 million.
Bob Gibson, Jason Zandberg and Devin Schilling are analysts at PI Financial.
This is an edited version of an article that was originally published for subscribers in the October 19, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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