2020 has proven to be a challenging period for the cannabis industry so far and we will continue to keep an eye on how the sector is able to perform from here. Although the recent trend has been to the downside, we have been able to identify a few bright spots in the industry and believe that selectivity will be more important than ever going forward.
When we are analyzing a cannabis company, there are a number of metrics that we take an in-depth look at and want to highlight some of the most important metrics:
- Balance Sheet Strength: Access to capital has become a major pain point for the sector and we are focused on companies that have enough cash on the balance sheet in order to execute
- Cash Flow: Aside from having cash on the balance sheet, we are focused on companies that are generating significant cash flow. We are primarily looking for businesses that are operating profitably and have a large total addressable market
- Management Team: This is the most important aspect of any cannabis company. We work to identify companies that are led by a management team that is focused on creating value for shareholders. We prefer well rounded teams that have proven track records of success
During the last year, the cannabis sector has been under immense pressure and this is a trend that our readers need to be aware of. Although this trend has shown no signs of changing, we believe the sector is reaching an inflection point as new markets come on-line and as Canada’s market appears to be gaining traction. Today, we want to highlight 3 Canadian cannabis companies that have come across our radar and are worth taking a look at.
Namaste Technologies: Continues to be an Execution Story
Namaste Technologies (N.V) (NXTTF) is well positioned to be a beneficiary of the changing landscape of the Canadian cannabis industry and possesses many of the traits that we consider integral to the overall success of a company in this industry. During the last year, the fundamental story recorded several major advancements and we are impressed with how the management team has been able to drive the story forward.
When compared to the average Canadian cannabis company, Namaste represents an attractive opportunity from a balance sheet strength and valuation standpoint. During the last few quarters, the company has been expanding its sales channels and we believe that the management team is focused on bringing the business down a path to profitability. From a cash flow standpoint, we are favorable on this aspect of the operation and expect this metric to be a key focus point that is commonly associated with the opportunity.
Namaste has an attractive operating structure and we are most excited about the growth profile that is associated with CannMart, a wholly owned subsidiary of the company. CannMart has played a key role in the success of the business and we expect it to become a more significant aspect of the business as Namaste continues to execute on previously announced initiatives. Canada’s cannabis 2.0 opportunity represents an attractive vertical of the industry and is a market that CannMart has been highly focused on.
When it comes to analyzing a cannabis company, we have a tendency to prefer businesses that represent differentiated opportunities. Namaste’s business model does not require the construction of massive cultivation facilities and we find this to be significant when it comes to managing cash flow. The company’s business is much less capital intensive than Aurora Cannabis (ACB.TO) (ACB) and we are favorable on this aspect of the story. Through CannMart, Namaste is positioned to be a major beneficiary of the legal cannabis movements and going forward, we will monitor how it is able to capitalize on emerging international markets.
Namaste has significant potential catalysts for growth, and we are favorable on its risk-reward profile. At current levels, we find the valuation to be attractive and believe that the opportunity is flying under the radar. Over the next year, we expect to see Namaste report major advancements, and this is an opportunity to be watching.
Aleafia Health: A Burgeoning Growth Story to be Watching
During the last year, Aleafia Health (ALEF.TO) (ALEAF) has been nothing short of an execution story and has been a business that we have been closely following. From Canada’s medical cannabis market to burgeoning international markets, the company has been executing of several initiatives that have been creating significant value for the business.
Although Aleafia Health reported major improvements over the last twelve months, the shares have traded lower with the rest of the Canadian cannabis sector and this is an opportunity that we are bullish on. In the most recent quarter, the company reported to be profitable and recorded incremental revenue growth when compared to the same period from last year. Going forward, this is a trend that is expected to continue, and we expect the business to benefit from having several significant revenue streams.
From medical cannabis sales to wholesale cannabis sales, Aleafia Health is levered to some of the most attractive verticals of the cannabis industry. From a pricing standpoint, the company has an attractive business and we are favorable on the amount of inventory that it has for sale. Over the next year, we expect Aleafia Health to report strong revenue growth and are favorable on the way the management team has been managing cash flow.
When it comes to the international cannabis opportunity, Aleafia Health has been active and has been capitalizing on this side of the business. We expect the international side of the business to play an important role in growth on a going forward basis and believe that this aspect of the story is underappreciated by the street. Aleafia Health has been capitalizing on the cannabis opportunity in Australia and in the European Union (EU). We are bullish on the growth prospects associated with these markets and will closely monitor how this side of the business supports growth from here.
Aleafia Health has access to capital and is well positioned to take advantage of organic and inorganic growth opportunities. We are favorable on this aspect of the story and believe that the management team has the business well positioned for growth. We consider Aleafia Health to be a differentiated opportunity and believe that this is a business that is flying under the radar.
Canopy Growth: Not Living Up to Expectations in 2020 So Far
Many cannabis experts and analysts consider Canopy Growth Corporation (WEED.TO) (CGC) to be the global cannabis leader and we have been closely following the business since 2014. The last twelve months have been hard on the company and we continue to closely monitor the opportunity. Last year, Canopy Growth fired Bruce Linton as CEO and Executive Chairman and this represented a major change in direction for the business.
Only time will tell if the change in leadership a strategic decision for the business and this was is a story that we will continue to closely follow. When compared to the rest of the cannabis sector, Canopy Growth has the strongest balance sheet by far. In 2018, the company received a $4 billion investment from a leading alcohol conglomerate, and this provided the business with a solid cushion from a capital standpoint.
The acquisitions that Canopy Growth has completed after the $4 billion capital infusion have not been impressive and this has been a major negative that is associated with the business. According to the most recent earnings report, the company still has more than $2 billion of cash and cash equivalents and we will monitor how the management team is able to use the capital to continue to grow the business.
So far, 2020 has not proven to be the bounce back year that many people expected it to be for Canopy Growth and we will keep an eye on the trend from here. We believe that the company has attractive growth prospects and will monitor how the new management team is able to drive the story forward.
Pursuant to an agreement between StoneBridge Partners LLC and Namaste Technologies Inc. (N)(NXTTF) we have been hired for a period of 180 days beginning October 1, 2019 and ending April 1, 2020 to publicly disseminate information about (N)(NXTTF) including on the Website and other media including Facebook and Twitter. We are being paid $7,500 per month (N)(NXTTF) for or were paid “0” shares of restricted common shares. We own zero shares of (N)(NXTTF), which we purchased in the open market. We plan to sell the “ZERO” shares of (N)(NXTTF) that we hold during the time the Website and/or Facebook and Twitter Information recommends that investors or visitors to the website purchase without further notice to you. We may buy or sell additional shares of (N)(NXTTF) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.
Pursuant to an agreement between StoneBridge Partners LLC and Aleafia Health Inc. (ALEF) we have been hired for a period of 180 days beginning August 15, 2019 and ending February 15, 2020 to publicly disseminate information about (ALEF) including on the Website and other media including Facebook and Twitter. We are being paid $8,000 per month (ALEF) for or were paid “ZERO” shares of unrestricted or restricted common shares. We own zero shares of (ALEF), which we purchased in the open market. We plan to sell the “ZERO” shares of (ALEF) that we hold during the time the Website and/or Facebook and Twitter Information recommends that investors or visitors to the website purchase without further notice to you. We may buy or sell additional shares of (ALEF) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.