Cabot Marijuana Investor's Year-End Favorites

12/23/2019 5:00 am EST

Focus: CANNABIS

Timothy Lutts

Publisher, Cabot Heritage Corporation

After a rough stretch for the sector, marijuana stock bargains abound; here are 8 that stand out, asserts Timothy Lutts, a leading specialist in the cannabis sector and editor of the Cabot Marijuana Investor.

There are several challenges to valuing marijuana stocks today, chief among them the facts that these companies tend to be fast-growing, and that many are still not yet profitable.

Nevertheless, by taking a look at those that do have earnings, and by calculating the price/sales ratio (PSR) for the rest, we can get some clues to where the bargains might be. Here are eight cheap marijuana stocks to consider.

Curaleaf (CURLF)

Curaleaf is a contender to be the largest multi-state operator (MSO) in the U.S.; pro forma third-quarter revenues, including its pending acquisitions, were $129 million.

With a market capitalization of $2.9 billion, that’s a price/sales ratio of six, which is not traditionally cheap, but for a company growing this fast (third-quarter revenues were up 189% from the year before) and in a leadership position, it’s not bad. CURLF was recently 61% off its old high and is now working its way back.

Aphria (APHA)

Aphria leads the Canadian cannabis industry by revenues, it has growing earnings and it’s not overly expensive, with a P/E of 16 and a PSR of 2. In my book, it’s the best value of the Canadian licensed producers.

But as word spread that licensed Canadian marijuana stores were opening at a pace too slow to handle the growing supply of product from Canadian growers, the stock was unable to resist the selling of Canadian cannabis stocks. After falling 72%, it is now building a bottom between $4 and $5.

Cresco Labs (CRLBF)

Chicago-based Cresco Labs is the fourth-largest MSO in the U.S., and destined to get even larger once its acquisition of Origin House, which is big in California, is complete.

The stock dropped 65% from peak to trough in 2019, and it hasn’t bounced much since, as investors are waiting for the third-quarter report (due tomorrow). But the stock looks like a decent value here, with a PSR of 6 and earnings expected in 2020.

Turning Point Brands (TPB)

Turning Point Brands is a well-managed company with a long history of selling other tobacco products, like snuff and chewing tobacco and ZigZag rolling papers, and it pays a small dividend too, currently 0.7%.

Investors piled into the stock from early 2018 to July 2019, sending the stock from 20 up to 57. But as the cannabis sector weakened, TPB was hit with an additional blow, the spread of vaping fears—which hit the company smack in the middle of its fastest-growing division of 2018.

Several weeks ago, the stock was back at $20, down 63% from its high. But on November 1 the company released an excellent quarterly report (which included great progress selling CBD), and since then the stock has come back to life. It’s currently selling at 1.3 times annual revenues and has a P/E ratio of 13.

OrganiGram (OGI)

OrganiGram is expected to announce its fourth fiscal quarter results today, but it’s already “pre-warned” that the results will be poor—and that’s one reason the stock was 76% off its high recently.

As with all the Canadian weed outfits, OrganiGram was hurt by the slow pace of legal Canadian store openings, but it was also hurt by lower yields, the result of a change in growing protocols that didn’t work. As I write, the P/E ratio is 14 and the PSR is four.

KushCo (KSHB)

KushCo specializes in distribution, packaging and gasses for the cannabis industry, so it’s to be expected that profit margins will be lower for the company and thus multiples will be lower as well. The stock fell 82% from its high, but it’s now building a base, with a PSR just a little higher than one.

Village Farms (VFF)

Village Farms used to be a low-margin business; it grew vegetables in greenhouses. But now it grows cannabis (in Canada) and hemp (in the U.S.). After falling 67% from top to bottom, the stock now has a P/E of 12 times forward earnings and a PSR of 2.

MedMen (MMNFF)

MedMen was an early darling of investors, peaking at over 10 way back in late 2018. But as other national MSOs have emerged, the bloom has come off MedMen — even though the company is still growing fast (revenues were up 1,399% in the latest quarter).

At this point its main claim to fame is that it has fallen so far — a massive 92% off its high. So yes, it’s cheap, with a PSR of 1. But recently, it was hitting new lows.

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