With the Cannabis Act (bill C-45) reaching Canada’s Senate this week for the vote expected to push toward legalization, the country is looking at legal sales of recreational cannabis commencing as soon as August or September. In preparation for this shift, growers have ramped up production capacities and investors have jumped in on opportunities to reap some of the anticipated $5 billion additional sales recreational weed should yield for Canada’s industry each year.
As more investors have opted into the industry, skyrocketing valuations among marijuana stocks are the unfortunate result.
Marijuana stocks company, Aphria (NASDAQOTH:APHQF), was previously considered a company with attractive valuation within the industry. Aphria’s acquisition of Nuuvera, considered among the priciest deals in industry history, along with the dilution following bought-deal offerings, has placed the company’s stock in an entirely different position of value. Aphria’s forward price-to-earnings ratio is now 84.
An even loftier example is Aurora Cannabis (NASDAQOTH:ACBFF), thanks in large part to the company’s recent $2.5 billion acquisition of MedReleaf (NASDAQOTH:MEDFF). While the company finished out its fiscal year in 2014 with slightly more than 16 million shares outstanding, this number has ballooned to nearly 565 million as of the latest quarter. With the combined costs of acquisitions and expansions, MedReleaf included, the marijuana stock’s forward PTE ratio is now over 200.
A few cannabis stocks offer forward PTE ratios below 30, a virtual bargain in the rapidly growing industry.
It’s not easy to find cheap pot stocks to buy in the industry, but the good news is, it’s still possible with a bit of digging. Here are three stocks to fit the bill:
1. Among cheap pot stocks, Innovative Industrial Properties (NYSE:IIPR) has the lowest forward PTE ratio at 20.
The best value among pot stocks at the moment may actually be an ancillary company in the industry, Innovative Industrial Properties, which is a small-cap real estate investment trust (REIT).
The business model behind this REIT is simple: purchase real estate (buildings and/or property) for the purpose of leasing long term to companies within a specific industry. Innovative Industrial Properties operates in the U.S., acquiring greenhouses for MMJ operations and leasing them for 15 years at a time, with the option of two extensions of five years for each lease. These longer-term leases allow time for Innovative Industries to generate a consistent stream of cash flow each quarter which is an important aspect of the REIT model with its moderately fixed costs.
Another aspect of the REIT model is the company’s responsibility for taking a large portion of its net operating income and returning it to shareholders, creating a dividend for investors around $0.25 each quarter (or a 3% annual yield). Adhering to this model gives REITs, like Innovative Industrial, the added benefit of side-stepping corporate income tax rates.
Companies involved in the cannabis industry within the U.S., where marijuana is still considered an illegal substance, do come with inherent risks. The good news, however, is the federal government seems willing, for the time being, to leave regulation in the hands of states with legalized marijuana industries. As more states legalize cannabis in some form, Innovative Industrial Properties may become even more of a bargain.
2. Those interested in investing in cannabis may consider CannTrust Holdings (NASDAQOTH:CNTTF), with its forward PTE ratio of 24.
The company’s competitive edge comes from its decision to include cannabis oils and extracts in its product offerings. So far, this move has paid off as evidenced in the company’s total sales of the most recent quarter, half of which came from oils. The higher margins and price points of cannabis oils versus dried forms allow CannTrust to maximize its per dollar revenue more so than peers offering only dried cannabis.
The company has a competitive edge with innovation as well. Two months ago, CannTrust rolled out new oil capsules featuring vegan hard shells, appealing to a more extensive market. The company also decided to partner with Grey Wolf Animal Health in a joint effort to expand into the pet health market with cannabis-based products. Not many growers offer a lineup of extracts and oils as diverse as CannTrust.
As for growing capacity, CannTrust will sport around 1 million square feet of greenhouse space upon the completion of its Niagara facility. This may be far less than most competitive growers, but, with CannTrust’s focus largely on higher-margin products, the space is more than sufficient.
3. Investors looking for marijuana stocks to buy will find a unique advantage in OrganiGram Holdings (NASDAQOTH:OGRMF), with its forward PTE ratio of 28.
Though CannTrust may be the best deal among marijuana growers, OrganiGram Holdings offers something unique to investors: a single growing facility. All other growers with anticipated production capacities beyond 100,000 annual kilograms have multiple sites. OrganiGram’s sole location is in Moncton, New Brunswick, with an expected completion date in April of 2020 and full capacity around 113,000 kilograms per year. This single grow site is a substantial advantage to the company and its investors because, with less cash going toward facility costs, margins ultimately rise.
Similar to CannTrust, the management team of OrganiGram has embraced the importance of diversifying product lineup to include cannabis oils and extracts. Per the latest quarterly report for the company, OrganiGram’s sales of cannabis oil increased 297% from the same quarter last year, a total of 552,000 milliliters. Oils may be a niche item, but, with their far higher price point, they bring in far juicier margins compared to dried cannabis.
OrganiGram may not be in the running to compete for some of the long-term supply deals, due to its expansion developing well into 2020, but, it is in the running to maximize its per-dollar revenue thanks to its centralized location and inclusion of cannabis oils.
(For more investor recommendations, read This Underdog Marijuana Stock is Worth Watching.)