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Since our look at the larger Canadian LPs 12 weeks ago, when we shared a smarter way to invest in that sub-sector than Canopy Growth, our selections have all outperformed the stock, which has dropped 66.7%, substantially:
We are glad to see the better performance from the LPs we suggested, but they are still down rather substantially. Since then, the New Cannabis Ventures Global Cannabis Stock Index has declined 8.8%, so the declines in Cronos Group (11.9%), Village Farms (19.7%) and Organigram (30.5%) have been steep. We include the performance for Tilray, which 12 weeks ago was by far the leader of the group in 2023, as well. It has dropped more than the three stocks we suggested were superior to Canopy Growth, falling 40.1%.
While Canopy Growth has plunged and now trades below tangible book value (just 40% of it), we remain concerned. The company has a lot of debt, less cash than debt, a big operating loss currently and projected by analysts for the future and an accounting issue with its majority-controlled non-cannabis unit, BioSteel. We continue to believe that it likely won’t be successful with its plan to retain its NASDAQ listing and complete its American mergers and that it won’t succeed if it is able to do so. Speaking of NASDAQ listings, investors should be aware that the stock faces a risk of delisting due to the price being below $1.00.
Tilray has declined a great amount, though it remains expensive in our view. Unlike its peers, the stock trades at 2.5X tangible book value. The company has more debt than cash, and its profitability is low with weak growth. It will report its fiscal Q4 ending 5/31 in July or August. We understand that it is a very diversified company, but investors interested in cannabis can find better selections in other cannabis companies in our view. In fact, the three companies we are suggesting have a combined market cap of just 90% of the Tilray market cap of $990 million and a much lower enterprise value.
We discussed how inexpensive Cronos Group, Organigram and Village Farms were relative to their tangible book values 12 weeks ago, and they are even cheaper by this metric currently. The companies have better balance sheets and cash flows but trade very low relative to their tangible book values:
- Cronos Group: 0.60X
- Organigram: 0.42X
- Village Farms: 0.34X
Village Farms has debt that exceeds its cash but that seems manageable. The company sold stock early this year that torpedoed the stock, but it is pursuing asset sales currently. Both Cronos Group and Organigram have a lot of cash and no debt, and each has a strategic investor. All of these companies do well in Canada but also have other markets in which they operate.
The Canadian cannabis market has matured and still has some regulatory issues. We view the lack of interest by investors in Canadian LPs as partially a reflection of the challenging environment there as well as in the cannabis sector overall, but the substantial declines in Canopy Growth and Tilray have played a role too. This week, StatsCan will be releasing April retail data for Canada, and the outlook at Hifyre isn’t great. Based on its point-of-sale data and its model, Hifyre projects retail cannabis sales will fall slightly sequentially in April relative to March. There is one less day, but the month had the 4/20 celebration. The 8.3% projected annual growth would be the lowest since the country legalized.
The three alternatives for Canopy Growth that we shared in late March have all outperformed it, but they have dropped sharply. We view these companies as very likely to recover their steep losses in the future and continue to suggest that owners of Canopy Growth and Tilray think about them as smarter investments.
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Alan & Joel