The Biggest Canadian Pot Stocks of 2020 – Part 2

The once-promising Canadian cannabis industry is facing a serious downturn thanks to the arrival of the coronavirus pandemic and an ongoing capital crunch that began in 2019.  

Last week, we took the temperature of the Canadian cannabis industry by examining five of the largest pot stocks—as determined by market capitalization—currently operating in the Great White North.

Unfortunately, the cannabis market has taken a hammering over the last month thanks to the ongoing coronavirus epidemic, which has left many formerly unstoppable heavyweights struggling to stay in the ring.

And if you take into account the capital crunch that arrived in late 2019—not to mention the ill-timed emergence of last year's "vape crisis"—it should easy to understand why investors have begun deserting the market in droves.

The world has been in a panic ever since the new Chinese coronavirus disease—which is now officially known as COVID-19—began stoking fears of a global pandemic in early 2020.

At this point, it seems clear that many pot stocks will struggle to survive the present market downturn—particularly if they have don't have enough cash on hand to ride out the doldrums—which means that the Canadian cannabis industry will be in for a bumpy ride in 2020.

However, not all pot stocks are created equal, and while some cannabis companies have seen their market capitalization crumble, others could be primed to experience significant growth over the next 12 months.

That's why we're continuing our deep dive into the Canadian cannabis market, and this week we're kicking things off with HEXO Corp.

Disclaimer: Past performance is not an indicator of future performance.

HEXO Corp

HEXO Corp (NYSE:HEXO) is an award-winning cannabis company operating in the consumer packaged goods sector, with an estimated market cap of $417.651 million.

The company is devoted to the production and distribution of cannabis products for the global market via its "hub and spoke" business strategy, and was originally incorporated in 2013 under the name, The Hydropothecary Corporation.

While HEXO was originally created to address the needs of Canada's medicinal cannabis market, it has since begun operating in adult-use recreational space, while also partnering with several Fortune 500 companies. This has helped to boost its brand recognition, while also allowing the company to pursue the best in cannabinoid isolation technology, licensed infrastructure and regulatory expertise.

The past five years have seen the cannabis industry landscape, and our company, evolve significantly. This evolution continues at a staggering pace, as HEXO ramps up production effort and significantly increases its inventory, further contributing to our capacity to meet the demand and to reach our sales and revenue targets.

HEXO Corp CEO and Co-Founder, Sebastien St-Louis

HEXO also gained significant ground by leveraging its distribution networks and production capacity, making it one of the largest licensed cannabis companies in Canada.

The company currently operates out of two facilities located in Ontario and Quebec—which constitutes 2 million square feet of manufacturing space—and is in the process of establishing a foothold in Greece which will be used to develop a processing, production and distribution centre for the European market. 

HEXO underwent tremendous growth during 2019, as it entered into a credit facility with CIBC and BMO for $65 million, doubled its workforce's size from 364 to 822, and entered into a supply agreement for 200,000 kg of hemp for CBD extraction purposes.

"Our Innovation, Development and Engineering team has grown significantly ahead of the legalization of edibles and now includes 25 professionals with PhDs and extensive experience in major consumer packaged goods companies," HEXO CEO Sebastian St-Louis said.

"This quarter [Q3 2019] saw HEXO remain on-track as it continues ramping up to $400 million in revenue in fiscal 2020, including completing the first harvest in our 1 million sq. ft."

 "Expansion and preparing to fund our ongoing expansion projects and innovation initiatives by entering a $65 million syndicated credit facility."

Unfortunately, the company has also been seriously weighed down by supply issues in recent months, which caused the pot stock's formerly billion-dollar market cap to slide below $500 million in value.

Back in the halcyon days of 2019 things were looking considerably more optimistic for HEXO, which saw the company publish sales guidance for 2020 predicting $400 million in revenue, along with the achievement of a peak manufacturing capacity of 150,000 kg. 

However, by January 2020 HEXO had retracted its previous revenue forecast—and achieved only a third of its predicted peak output capacity—while also announcing mass redundancies throughout the company.

And even with these new cost cutting measures in place, HEXO's outlook seems unlikely to improve for some time, as the company chances of turning a profit in the near term are slim at best.  

Disclaimer: Past performance is not an indicator of future performance.

OrganiGram Holdings

Organigram Holdings (TSX:OGI) is a Canadian licensed producer of premium quality cannabis and extract-based products with a market cap of $410.613 million. The company is dedicated to the production of high-quality cannabis for medicinal patients and legal-use recreational consumers in the Canadian market.

Additionally, Organigram has maintained an active focus on the development of international business partnerships to extend its global footprint a build market share.

Access to a large, consistent volume of CBD-producing hemp has become increasingly important as Canadians express their demand for CBD-rich products for use in both recreational and medical capacities. We've heard the call for CBD in the market and this positions Organigram to meet that demand.

Organigram Holdings CEO, Greg Engel

The company's unique business model has also allowed it to secure the lowest cultivation cost per gram of any Canadian cultivator, which was achieved thanks to operational efficiencies generated by Organigram's proprietary software system, Organigrow, as well as its Moncton based production campus, which can handle growing, processing and distribution duties.

This means that Organigram is able to operate with significantly reduced supply chain costs, while a three-tiered growing system allows the company to triple its potential growing area by making use of vertical space inside the 500,000 square foot cultivation site.

"Once again, we are pleased to receive licensing approval consistent with our expectations and the streamlined process we have experienced to date" Organigram CEO Greg Engel said.

"Our Phase 4 facility expansion remains on schedule to meet growing demand and further contribute to efficiencies of scale."

And if Organigram can achieve its peak operating capacity, the company could potentially produce up to 230 grams of cannabis yield per square foot, which is almost triple the output of its competitors.  

As a result, Organigram actually managed to achieve a positive adjusted EBITDA for the FY2019—as well as the first fiscal quarter of 2020—despite seeing its market cap decline by more than 30%.

This makes it virtually the only Canadian cannabis grower on the playing field to have actually generated a profit, which was achieved by leveraging the competitive advantages offered by the company's Moncton facility.

This has made Organigram well positioned to enjoy significantly larger revenue margins than its peers, although it has similarly been afflicted by the global market downturn that arrived in recent weeks as the result of the COVID-19 pandemic.

Disclaimer: Past performance is not an indicator of future performance.

The Valens Company

The Valens Company (OTC:VLNCF) is a cannabis extraction services provider with an estimated market cap of $278.12 million.

The company was originally known as "Valens GroWorks" until a name change in 2019, and its most recent quarter saw Valens finally achieve profitability, which is still the great white whale of many Canadian pot stocks.

The introduction of our new parent company brand, The Valens Company, on the eve of Cannabis 2.0, is a reflection of our growth and transformation over the past few years. Valens is best known as a leader in extraction, but we are much more than that. After years of research, product development, technology acquisitions and more, we are thrilled to introduce the next phase of growth for our company.

The Valens Company CEO, Tyler Robson

Valens also recently entered into an amended manufacturing and sales licence agreement with SōRSE Technology Corporation (SōRSE) which grants Valens an exclusive licence for its proprietary SōRSE emulsion technology.

"This Agreement shows Valens' commitment to invest and broaden its IP portfolio and enable its customers to bring differentiated, next generation products to market," Valens President Jeff Fallows said.

"As we move into "Cannabis 2.0" in Canada, we believe the products that offer consistent, high quality and predictable user experiences, like those we are able to create with SōRSE, will capture the lion's share of attention and be the hallmark for brand development in a strict regulatory environment."

 "With this expanded agreement in place, we have extended this opportunity for our existing customers to key international markets and at the same time established a platform for international consumer brands to add high quality, cannabis infused products to their portfolios."

Additionally, Valens has already secured a number of key processing agreements that are set to run for up to 24 months—ensuring the company remains profitable—and is currently one of the most low cost North American pot stocks when it comes to price-to-earnings ratios, which is great news for investors.

Looking forward, the company expects to see a return to the aggressive volume growth previously generated by its extraction facilities, as large amounts of hemp biomass are brought in from companies requiring the large production runs needed to support the rapidly expanding cannabis market.

Although, at this point it is still unclear if Valens will be able to weather the current global market downturn which has left the cannabis industry facing a capital crunch.

"The reason we have built five different types of extraction in house is so that we can facilitate being a one stop shop for our customers by having the means to produce a large variety of next generation white label products," Fallows said.  

"This quarter [Q4 2019] shows the flexibility of our operations and represents an inflection point in our acceleration into "Cannabis 2.0″ oil-based products."

"Through the incredible demand we are seeing, we expect white label sales to continue to ramp up as we increase the number of white label contracts and volume of the contracts themselves."

Disclaimer: Past performance is not an indicator of future performance.

MediPharm Labs

MediPharm Labs (TSXV:LABS) is a Canadian Licensed Producer with a market cap of $194.987 million that targets the B2B market with state-of-the-art extraction technology. The company takes raw cannabis biomass and processes it into purified pharmaceutical-grade cannabis oil, concentrates and extracts, as well as other cannabis-derived products.

MediPharm was also the first cannabis company in Canada to receive a license from the ACMPR allowing it to produce oils without the need for a cultivation license.

This gave MediPharm a considerable first mover advantage—which it leveraged to become a sector-leader in the cannabis extraction space—and at one point the pot stock was expected to emerge as one of the top performers of 2019.

We're pleased to be working with our brand-name customers in the field of topicals, a key product category under legalization 2.0 and for MediPharm Labs' customers. As we continue to evolve our platform and add expertise in the area of topicals, we will be able to forge new agreements that will engage more of our capabilities including innovation services that extend customers' product solutions.

MediPharm Labs CEO, Pat McCutcheon

And this certainly seemed to be the case in January 2020, when the company was riding high on the news that it had just achieved its second consecutive quarter of profits. However, this wasn't enough to insulate MediPharm from the arrival of COVID-19, and by March its market cap had declined by approximately $190 million.

Luckily for investors, many of MediPharm's processing contracts are for periods of 18 to 36 months, which should ensure the predictable cashflows necessary to ride out the coronavirus downturn.

"Following Cannabis 2.0 legalization in Canada, it's clear there is demand for cannabis topicals," MediPharm Labs CEO Pat McCutcheon said.

"We also expect worldwide demand for topicals could increase as new cannabis markets start to come online and legalize concentrate based products."

"With our GMP-certified platform, and deep scientific resources, MediPharm Labs is capable of creating novel, high-quality, high-potency base compounds that our customers and medical and adult-use consumers can trust."

The company also recently launched a new line of branded cannabis products—including a regular strength cannabis oil containing approximately 25 mg/mL of CBD to 1mg of THC—which are expected to rapidly build market share in the increasingly lucrative high concentrate CBD market.

"True to our pharma roots, based on a foundation of quality, our first branded product is a high-concentration CBD oil, created by our expert pharmaceutical team, specifically for medical and wellness purposes," McCutcheon said.

"We believe our focus on purity, potency and price will make MediPharm Labs CBD REGULAR FORMULA 25 Canada's preferred choice."

Disclaimer: Past performance is not an indicator of future performance.

Sundial Growers

Sundial Growers (NASDAQ:SNDL) is a recent entrant to the field—having only completed its IPO and NASDAQ-listing in mid-2019—but this didn't stop the cannabis supplier from kicking things off with a bang, when it arrived on the scene with an initial market cap of $1.1 billion.

Unfortunately, the situation would soon take a turn for the worse—as Canada's cannabis supply issues began to affect its revenue outlook—which led the company to shed more than $700 million from its market cap by the end of 2019.

I am excited and confident that Sundial will continue to improve the operational excellence and the quality of the products grown in the Bridge Farm facilities. There is a local, European and global demand for CBD and other cannabis products, which we are well positioned to supply. Sundial is poised to become a leader in the healthcare sector.

Sundial Growers President, David Ball

The beginning of 2020 also brought further losses, and by March Sundial's capitalization had dwindled even further, dropping by a further two thirds of its previous value to just $111.604 million.  

Another key issue facing the company is its exclusive focus on the whole market, which is useful for offloading large volumes of cannabis biomass but offers significantly lower margins when compared to the legal-use recreational space.

Sundial has previously confirmed that it plans to gradually transition away from exclusively focusing on the wholesale market, and as part of this the company recently announced the acquisition of the UK-based Bridge Farm Group, with the aim of producing and sell high-quality CBD products globally.

Sundial intends to make use of Bridge Farm's three growing facilities—which constitutes 1.5 million sq. feet of growing space—to cultivate both hemp and cannabis, making it an important milestone in the company's international expansion plans.

"This is a significant acquisition for Sundial, taking us one step closer to our goal of being one of the leading cannabis companies in the world," Sundial CEO Torsten Kuenzlen said.

"We recognize that expedient global expansion requires a combination of organic growth and strategic acquisitions. Bridge Farm's experienced management team, strong market position and operational excellence made it an ideal acquisition."


This could be one of the best investing opportunities of 2020

Legislative changes are blowing through the US, and with it, an ever-increasing number of states legalising cannabis for recreational use.

With the success seen in Illinois, which legalised for adult-use on January 1 and saw products moving off the shelf at an unprecedented rate, this company is primed to take advantage of the booming US recreational market.

They have secured partnerships with the biggest cannabis companies in the US, and their portfolio is second to none.

And with the sector-wide pullback of 2019, this company is now at a bargain-basement price.

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Hugo Gray
Hugo Gray

Hugo Gray is a Melbourne-based journalist with a body of work that covers a diverse range of topics, including immigration law, sex technology, and now the rapidly expanding cannabis industry.

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