These Cannabis Stocks Are Prepared for a Recession
The coronavirus (COVID-19) pandemic has upended global stocks, with cash-strapped investors still trying to determine how the bear market will impact the global economy, how long a recession could last, and how their favorite cannabis stocks will fare.
Two of the best cannabis stocks, with rock-solid fundamentals and huge cash positions that should help them weather a coronavirus-fueled recession or sustained bear market, are Valens GroWorks Corp (OTCMKTS:VLNCF, CVE:VLNS) —also known as The Valens Company—and Canopy Growth Corp (NYSE:CGC).
Canopy Growth Stock Overview
Sometimes bigger is better. With a market cap of $5.9 billion at the time of this writing, Canopy Growth is the largest cannabis stock in the world.
The seed-to-sale pot company has over five million square feet of licensed manufacturing space, comprising greenhouse and indoor growing facilities, with operations in 12 countries and five continents.
The company’s award-winning product line includes dried flower, edibles, beverages, vapes, oils, concentrates, softgels, and hemp.
As the world’s largest cannabis company, Canopy Growth corp is responsible for selling the most recognized brands in the marijuana industry, including “Tweed,” “Spectrum Therapeutics,” and “Tokyo Smoke.”
During the its fiscal quarter ended December 31, 2019, the company maintained its leading retail market share, with an estimated 22% of the Canadian recreational pot market. (Source: “Canopy Growth Reports Third Quarter Fiscal 2020 Financial Results,” Canopy Growth Corp, February 14, 2020.)
With 27 retail stores either owned (23) or licensed (four), Canopy Growth’s retail banner is one of the largest in Canada. And the company was expected to open 10 new Tokyo Smoke stores in the first half of 2020. But the coronavirus changed those plans.
On March 17, Canopy Growth announced that, due to the coronavirus outbreak, it was temporarily closing all 23 of its corporately owned Tokyo Smoke and Tweed retail locations across Canada. (Source: “Canopy Growth to Temporarily Close Corporate Owned Retail Amid Response To COVID-19,” Canopy Growth Corp, March 17, 2020.)
“This is a big decision but it was also an easy one to make – our retail teams are public-facing and have been serving an above-average volume of transactions in recent days,” said CEO David Klein.
That doesn’t mean Canadians can’t still get their hands on Canopy Growth’s products.
They can purchase medical cannabis through Spectrum Therapeutics and recreational marijuana in certain provinces though Tweed’s and Tokyo Smoke’s e-commerce platforms. In all of the other Canadian provinces, Canopy’s products can be purchased through government-run online retail channels.
|Canopy Growth Stock Information|
|Market Cap||$5.9 Billion|
|Shares Outstanding||349.7 Million|
|50-Day Moving Average||$17.46|
|200-Day Moving Average||$20.51|
(Source: “Canopy Growth Corporation (CGC),” Yahoo! Finance, last accessed March 23, 2020.)
Strong Q4 Revenue Growth
On February 14, Canopy Growth announced its financial results for the third quarter of fiscal 2020, ended December 31, 2019.
Thanks to acquisitions, new products, the opening of new retail locations, and international expansion, Canopy Growth has been reporting strong revenue growth.
Total third-quarter gross revenue increased 39% year-over-year and 15% sequentially to CA$135.6 million. Net revenue increased 49% year-over-year and 62% sequentially to CA$123.8 million. (Source: Canopy Growth Corp, February 14, 2020, op. cit.)
“In Q3 we executed across Canada, in our international markets and in our strategic acquisitions to drive revenue growth,” said Klein.
In the quarter, Canopy Growth reported an adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) loss of CA$92.0 million, a CA$64.0-million improvement compared to the second quarter of fiscal 2020.
The EBITDA improvement was a result of higher sales, improved gross margins, and lower operating expenses. The company’s total operating expenses dropped 14% sequentially to CA$231.7 million.
EVP & CFO Mike Lee said that Canopy is taking further steps to reduce its costs and to “right-size” the business to ensure it can generate a healthy margin profile and cash generation.
Canopy Growth Corp ended the third quarter with a gross cash balance of CA$2.3 billion and with cash and cash equivalents of CA$1.6 billion.
While the coronavirus will hurt the company’s fiscal 2020 revenue, it should still report strong full-year revenue. In the first three quarters of fiscal 2020, gross revenue increased 120% year-over-year to CA$324.5 million. Meanwhile, year-to-date net revenue climbed 120% to CA$290.8 million.
Moreover, thanks to its strong cash position, Canopy Growth should be able to weather the downturn and move ahead with its aggressive international growth strategy.
Valens GroWorks Stock Overview
Valens GroWorks Corp is the largest third-party cannabis extraction company in Canada. Valens takes cannabis grown by large marijuana producers and turns it into refined ingredients used in edibles, vapes, beverages, topicals, and other products. (Source: “The Valens Company: February 2020,” The Valens Company, last accessed March 23, 2020.)
Thanks to a recent acquisition, the company is on its way to being a major player in the cannabis-infused beverage market.
In September 2019, it signed a five-year white label deal with Iconic Brewing Co to make a minimum 2.5 million pot-infused beverages. (Source: The Valens Company Launches White Label Cannabis-Infused Beverages In Canada,” The Valens Company, March 5, 2020.)
Thanks to the growth in the market for cannabis-infused products, Valens Groworks Corp is the largest third-party cannabis product development and manufacturing company on the planet.
To that end, on March 5, the company announced the launch of a new line of cannabis-infused beverages under the white-label agreement with Iconic Brewing. The new line includes a cannabidiol (CBD)-infused iced tea and tetrahydrocannabinoll (THC)-infused citrus water.
To meet the growing demand for its extraction and white-label services, Valens is increasing its annual production capacity this year from 425,000 kilograms (937,000 pounds) of dried cannabis and hemp biomass to 1.0 million kilograms (2.2 million pounds).
Valens Groworks Stock Information
|Market Cap||$300.0 Million|
|Shares Outstanding||125.5 Million|
|50-Day Moving Average||$2.33|
|200-Day Moving Average||$2.45|
(Source: “Valens GroWorks Corp. (VLNCF),” Yahoo! Finance, last accessed March 23 2020.)
Record Q4 Financial Results
It’s one thing to have a strong cash position; it’s another to have strong fundamentals and to report record results.
In late February, Valens Groworks Corp announced that its revenue for the fourth quarter increased 86% quarter-over-quarter to $30.6 million, the high end of guidance. (Source: “The Valens Company Reports Record Financial Performance in the Fourth Quarter and Fiscal Year Ended November 30, 2019 With Q4 Adjusted EBITDA of $17.7 Million,” The Valens Company, February 24, 2020.)
The company noted that the rollout of cannabis-infused products in early 2020 and the development of white-label initiatives helped it report record fourth-quarter revenue.
Fourth-quarter gross profit climbed to $22.6 million, up 76.6% from the third quarter. Fourth-quarter net income advanced 14% sequentially to $4.4 million, or $0.04 per share.
Valens GroWorks Corp reported fourth-quarter adjusted EBITDA of $17.7 million, up 86% from the third quarter.
Valens ended the fiscal year with a strong balance sheet, with $58.7 million in cash and short-term investment, as well as a net working capital position of $88.2 million.
Tyler Robson, CEO of Valens GroWorks Corp, commented, “Our multi-year extraction contracts with industry leading players positioned us as the partner of choice in the industry and drove significant revenue, gross profit and adjusted EBITDA growth.”
During the current economic downturn, the cannabis companies with the strongest market penetration and cash positions will be best positioned to take advantage of the markets when they rebound.
Two of the best cannabis stocks that fit this bill are Valens Groworks Corp and Canopy Growth Corp.