Last week, the cannabis sky was falling. As a majority of Canada’s major LPs
reported quarterly earnings that missed analyst estimates and scaled back their revenue expectations, some predicted it was the beginning of the end. This week, the
sky is climbing back up.
Clearly some investors are realizing that the panic of last week might have been too steep, but another clear explanation comes from developments in the US. On Nov. 18, Florida-based
TrulieveCannabis Corp. (
CSE:TRUL) reported a
strong quarter with double-digit growth, showing that the sector still has room to grow south of the border. Two days later, federal cannabis prohibition was
one historic step closer to ending as the US House Judiciary Committee voted in favor of a bill that would decriminalize the plant.
What’s going on in the sector? How are cannabis investors reacting to the news, and how will the market look moving forward? By analyzing the news, the directions the market is headed, and the community at Stockhouse, we’re going to start making sense of it all.
Normally we cover many sectors on our weekly Buzz review of the Bullboards, but this week we’re diving deep into the most popular and contentious sector: cannabis. A lot of Stockhouse users have jumped on board the cannabis investment hype, so let’s look at what’s going on in some of the top discussion boards.
Once the earnings results started coming in last week, the picture became clear that most of the majors had overstepped, including first-place
Aurora Cannabis Inc. (
TSX:ACB,
Forum). At the same time, the negative wave of results brought down companies that didn’t report like
Aphria Inc. (
TSX:APHA,
Forum) and ones that posted an impressive profit like
Aleafia Health Inc. (
TSX:ALEF,
Forum). Together, they offer us three distinct stories for assessing the market, so let’s start with Aurora
.
The biggest “loser” coming out of last week’s earnings reports was undoubtedly
Aurora Cannabis Inc. Despite being the last major LP to issue its report (or maybe because of it), it easily drew the largest amount of scrutiny. At the end of the day on Nov. 15, ACB
released its fiscal quarter results, missing revenue expectations and halting work on plants to save on expenses. Shares fell from $4.38 on Nov. 15 to $3.00 by Nov. 18.
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But one of Aurora’s moves to make it through seems to have paid off. The company announced the
early conversion of debentures in a move to convert its debt to common shares, and at least
94% of holders took up the offer. The ACB Bullboard took this, along with a rising tide for cannabis shares this week, to mean a positive long-term outlook. Though many investors got in for quick bucks, Stockhouse Member
Sevam123 urged investors to remember the tech bubble and think long-term.
“This reminds me of the tech bubble. Better to be a long-term investor through a bubble. Question is whether Aurora will be like Pets.com or like Amazon.
If you had $100k in each of Pets.com and Amazon in February 2000 you would have owned about 1,300 amazon shares and 9,000 Pets.com shares. By November 2001 your shares in Pets.com would have reduced in value to zero and you Amazon shares would have dropped from $75 per share to $7.15 per share. Your $200k original investment would only be only worth $9,295.
Now imagine that you never sold. Today, of course, your shares in Pets.com would still be worth zero but the 1,300 Amazon shares you never let go would be worth $1,750 a piece. Your $200k would have shrunk to $9k but now would be worth $2,275,000. A 13.5 % average rate of return over 19 years is not too shabby…
So again, the question you need to answer for yourselves in whether you think Aurora is going to be the Amazon.com of cannabis or the Pets.com. My money is on Amazon. I'll continue to sit and patiently watch it all play out.”
(Po?st: Bubble? - We've Seen This All Before So Relax)
On the other side of the equation we have
Aphria Inc. Initially it held against the sector-wide decline early in the week before succumbing after all major LPs had released their earnings. Shares of APHA fell from $5.92 on Nov. 13 to $5.03 on Nov. 20. While other companies were releasing their earnings, Aphria announced on Nov. 15 the
election of its board of directors and new executive appointments.
But this week, Aphria has bounced back higher than most, already climbing back above $6.00. The APHA Bullboard has long begrudged the connection of the company to the sector’s health after previously posting positive quarter results where the other LPs failed, but now it’s looking like that connection might pay off as investors look to correct the sector and focus on cannabis long-term. At the bottom, Stockhouse Member
Vinny57 was one of many that have stopped being surprised when the company gets dragged lower, and its looking like their assertion was on the money.
“Aphria is just being dragged down with all the losing LPs. Aphria is NOT a losing LP. It is the #1 LP in the country. This is a systemic bloodbath of the industry and has little to do with the financials, management nor production of this company. I will not add nor sell at this stage of the game as I am heavily invested in this company already and waiting for next fall to reap the rewards. However, if I were sitting on the sidelines waiting for the right time to drop some money on Aphria, the best LP in the country, this would be the time.”
(Po?st: FEAR!)
Though many cannabis companies failed to deliver on recent expectations, a few managed to beat them, including
Aleafia Health Inc. On Nov. 12 the company
reported its first profitable quarter, with sales up across the board, and an
industry-leading low cost of production at $0.08 per gram. That explains the spike in ALEF’s chart, with shares climbing from $0.70 on Nov. 7 to $0.92 on Nov. 11. Then the rest of the sector started underdelivering and ALEF came right back down.
Still, Aleafia’s performance and resilience made many on the ALEF Bullboard ecstatic and eager for the long-term. As Stockhouse Member
vinneyquaw2 pointed out to others, the jump in share price was a bit too high for current revenue levels, but as its quick climb back is showing, the company’s growth should show well in the next quarters.
“The market makers probably have Aleafia priced right at .70 per share (I hate to say), but if you use 10 times earnings then I guess we're priced correctly i.e. Aleafia had $5 million in revenue for the quarter. Multiply $5 million times 4 quarters = $20 million - now multiply that $20 million times 10 equals $200 million (market cap) and that’s pretty much where Aleafia is now.
…You have to strip away hype as there isn't anymore of that sentiment left. People invested into these pot stocks when hype was driving the share price… Like I said show me the money or else! Canopy growth had a market cap of 20 billion dollars, where are they now? 4 billion. In order for Canopy to sustain a 20 billion dollars market cap they would have to make 2 billion dollars per year - they were miles away from that...
We can all see if my post and my method of valuation is correct we've got a huge hill to climb, but at least we're growing to become bigger. A lot of the bloated fat cats that jumped in with both feet forward are backpedaling and panicking… having to lay-off workers and halt capital projects - at least we're not in that position...”
(Po?st: MJ company valuations)
After that crazy Cannabis week, we’re looking for a bit of normalcy in market activities ahead of the winter holidays (although with China trade issues resurfacing that might be a longshot). At the same time, we’re also set on delivering the best tailored content to our Stockhouse audience, so we’ve been polling on our homepage to find out what topic our readers are interested in.
(Click image to go to the poll)
So far it’s not surprising that cannabis is on top, but many may be surprised to see esports and technology above sectors like gold and energy. The poll is still open
on our homepage for another week so make sure you head over or click the image above to cast your vote.
With time comes wisdom, and next week we’ll be able to see how the economy is faring heading into December. Where does cannabis stand, is the energy recovery for real, and what small cap companies are Stockhouse Bullboard users going crazy for? Find out on next week’s Buzz on the Bullboards. For previous editions of Buzz:
click here.
FULL DISCLOSURE: Aleafia Health Inc. is a paid client of Stockhouse Publishing Ltd.