This is a copy of the August 11th edition of our weekly Newsletter, which we have been publishing since October 2015.
The Canadian Cannabis LP Index closed this week at a level that was first reached in December 2017 and not too far from the subsequent lows since then, set in late December 2018. With all of the progress in the industry since then, it’s fair to ask if perhaps the LPs offer reasonable valuations after the 20-month consolidation that includes a 40% decline from the early 2018 peak. This is a great question, subject to a lot of debate and with no definitive answer in our view. We like how the analyst community has moved from judging the companies on conjured metrics like “price to funded capacity” to more traditional ones, like price-to-sales, price to EBITDA or price to earnings (on a forward basis!), but we wonder about how correct those estimates will prove to be.
Today, we want to introduce a valuation metric that we don’t see discussed often for the cannabis sector, price-to-tangible book value (P/TB). For those not familiar, this is a metric that value investors traditionally consider. It takes the shareholder equity less any intangible assets or goodwill on the balance sheet and compares this to the market capitalization of the company. We take a slightly more sophisticated approach and adjust the market cap (and equity amount) for dilutive securities like convertible notes, warrants and options that are “in-the-money”.
With the prices of many stocks flat-lining or declining over the past 20 months and substantial capital raised during that period, P/TB has become quite reasonable for many LPs. We have culled the 51 Canadian LPs that we track, breaking the group into two based on their current revenue generation. The list below, compiled and maintained at 420 Investor, includes 20 companies (39%) trading at 3X or less for current quarterly revenue in excess of $5 million or 2X for those below (in alphabetical order). Please note that inclusion should not be construed as a recommendation:
- 48North: 1.6X
- Aphria: 3.0X
- Beleave: 1.1X
- CannTrust: 1.6X
- Canopy Growth: 2.7X
- Delta 9: 1.8X
- Experion: 1.5X
- Green Organic Dutchman: 1.8X
- Harvest One: 1.7X
- HEXO Corp: 2.3X
- Indiva: 1.6X
- Invictus: 0.9X
- MPX International: 1.8X
- Namaste Technologies: 1.9X
- Pure Global Cannabis: 1.7X
- Supreme Cannabis: 1.7X
- THC Biomed: 0.9X
- VIVO Cannabis: 2.1X
- Wayland: 1.1X
- WeedMD: 2.1X
We think it can be helpful to consider P/TB but caution against using it exclusively or even as a primary metric. For example, buying a stock that is near its tangible book value when the company is losing money with poor prospects is a recipe for disaster, as this will be chasing a declining tangible book value down. Another factor is that assets can be written down over time, resulting in a lower tangible book value. Similarly, as CannTrust investors are aware, liabilities can arise. Also, one should consider that many stocks with very high P/TB or even negative P/TB have proven to be successful investments, so a high valuation by this metric shouldn’t necessarily result in exclusion from consideration. Finally, it’s important to understand that raising capital rather than generating profits has yielded improved tangible book values in the sector to date, but this isn’t sustainable.
The bottom-line: Investing in a solid company with good growth prospects, a reasonably low P/TB and the potential to build tangible book value over time sounds like a good plan, and this opportunity may now exist for several Canadian LPs.
Green Growth Brands has doubled down on their core mission statement, which is simply to be a leader in cannabis retailing. The company has been building its CBD business by securing additional distribution through Designer Brands Inc., the parent company of DSW shoe stores, and Abercrombie & Fitch Co. and is expanding its footprint of Seventh Sense Botanical Therapy shops from the current 100 to an expected 200+ by the end of calendar year 2019. Green Growth Brands is also building its MSO platform, which now includes the potential for up to 47 dispensary licenses in three key states, Florida, Nevada and Massachusetts. It also has a pending acquisition of a leading cannabis extracts brand, Moxie.
To learn more about Green Growth Brands, a client of New Cannabis Ventures, visit the company’s Investor Dashboard that we maintain on its behalf and click the blue Follow Company button in order to stay up to date with their progress.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
- $68.4 Million Epidiolex Sales Drive GW Pharma’s $72 Million Revenue in Q2
- Aurora Sees Q4 Cannabis Revenue Above $90 Million
- Guest Post: BDS Analytics Details Cannabis Market Trends in 4 Key Western States During June
- Cannabis REIT Improves Q2 Revenue by 160% to $8.6 Million
- Cannabis Wholesale Marketplace Operator LeafLink Raises $35 Million
- Columbia Care Q2 Revenue Doubles to $19.3 Million
- CV Sciences Q2 CBD Revenue Grows 36% to $16.9 Million
- Exclusive: Elixinol Global Transitions Leadership Ahead of Major CBD Growth
- Exclusive: Global Cannabis Stock Index Extends Correction in July While Retaining 13.4% YTD Gains
- GrowGeneration Posts $19.5 Million Revenue in Q2
- Guest Post: RICO Claims Are a Substantial Risk to Cannabis Operators
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Alan & Joel