Valens Company Inc.: $1.22 Pot Stock Setting up for Big Gains?

valens stockThis Pot Stock Could Be Special

We know that the pot industry offers huge growth potential. But the industry is also a fast changing one due to market dynamics and the evolving regulatory environment. As a result, pot companies can’t simply sit on their accomplishments—they have to adapt.

One pot stock that stands out in this fast-changing environment is Valens Company Inc. (OTCMKTS:VLNCF, TSE:VLNS), which started out by focusing on the extraction side of the business.

In fact, with an annual capacity of 425,000 kilograms (936,965 pounds) of dried cannabis and hemp biomass at its purpose-built facility in Kelowna, British Columbia, Canada, Valens is currently the largest third-party extraction company in the Canadian cannabis industry. (Source: “The Valens Company,” Valens Company Inc., last accessed September 28, 2020.)

But as I said, the pot industry is not standing still. Things are constantly changing, especially within today’s extraordinary operating environment due to COVID-19.

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In particular, the pandemic has resulted in reduced workforces and lower cultivation output at many cannabis producers; in turn, this has led to decreased demand for extraction.

Unsurprisingly, in the second quarter of Valens’ fiscal year 2020, which ended May 31, the company experienced a drop in toll extraction revenue. (Source: “The Valens Company Reports Financial Results For The Second Quarter Of Fiscal 2020,” Valens Company Inc., July 15, 2020.)

The neat thing is, even though Valens Company Inc. is known for its extraction capability, it also provides a whole suite of analytical testing, formulation, and product development and custom manufacturing services.

In particular, while many cannabis companies grew less pot sequentially due to the COVID-19 pandemic, they were asking Valens to produce more of their products—giving a boost to the company’s white label and custom manufacturing business.

To give you an idea, in the second fiscal quarter, Valens manufactured 36 SKUs, representing a huge increase compared to nine SKUs in the first fiscal quarter.

And that was just a start. Even though Valens has not reported its third fiscal quarter results as of this writing, it did provide an update recently, revealing that, in the three months ended August 31, it manufactured 56 white label and custom manufacturing product SKUs. (Source: “The Valens Company Manufactures Record Number of Product SKUs in the Third Quarter Of Fiscal 2020,” Valens Company Inc., September 18, 2020.)

This represented another 55.6% in sequential growth in the number of SKUs!

“In the third quarter, Valens manufactured the widest range and highest number of oil-based products in partnership with some of the most prominent brands, companies and distributors in the cannabis space on a domestic and international scale,” said Valens’ chief executive officer, Tyler Robson. (Source: Ibid.)

“As a result of the challenging extraction environment discussed in the second quarter, we have accelerated our custom manufacturing and white label services footprint, allowing the Company to improve efficiencies and increase its production and manufacturing resources,” he added.

Looking at the chart below, you’ll see how fast the company managed to grow its white label and contract manufacturing business in just over a year.

(Source: “The Valens Company,” Valens Company Inc., Op. cit.)

Mind you, although the company’s most recent financials weren’t that impressive sequentially, they still represented massive year-over-year growth. In Valens’ second quarter of fiscal 2020, it generated CA$17.6 million in revenue, which more than doubled the CA$8.8 million in revenue earned a year ago.

At the same time, the company delivered sizable year-over-year improvements in gross profit as well as adjusted earnings before interest, taxes, depreciation, and amortization.

In addition, while the pot industry has been impacted by the COVID-19 pandemic, there is a big catalyst for Valens stock going forward—Cannabis 2.0.

You see, Canada entered Cannabis 1.0 when the country legalized recreational pot for adult use in October 2018.

One year later, the country legalized cannabis derivative products such as edibles, vapes, and infused beverages. This second phase of legalization moved the country to Cannabis 2.0.

Pot companies love derivatives because they tend to offer higher margins compared to dried flower. And, to bring these oil-based products to the market, Valens’ expertise could come in handy.

In fact, Valens Company Inc. is already the extraction partner for some of the leading Canadian pot companies, including Canopy Growth Corp (NYSE:CGC) and Tilray Inc (NASDAQ:TLRY), among others.

Analyst Take

Put it together and you’ll see why VLNCF stock—which trades at just $1.22 apiece—could be special. Valens is manufacturing a record number of products for the biggest names in the industry, and Cannabis 2.0 should only bring further demand for what the company offers. Even though the COVID-19 pandemic has presented some challenges, Valens Company Inc. could be a winner in the long run.