If you’ve done a search for the top cannabis companies to invest in, chances are that you’ve come up with some pretty big names. Companies like Aurora Cannabis (ACB), Cronos Group (CRON), Tilray (TLRY), Canopy Growth (CGC) and Aphria (APHA) are among the top on countless lists around the web. Unfortunately, big opportunities like Veritas Farms (VFRM) are being missed.
Sadly, it’s easier to make an argument that these plays are highly overvalued than it is to argue that there’s an opportunity to be had. With bubble-like investor interest in these names just before Cannabis became legal in Canada, these stocks rocketed to astronomical valuations. While there has been a bit of downward pressure throughout 2019, valuations are still hard to swallow.
Does that mean that cannabis isn’t the place to be right now? No! It means that you’ve got to get creative about finding strong opportunities.
Before I go any further here, I want to be clear about one thing. I’m not an investment advisor or broker. I don’t know your personal financial goals and even if I did, I wouldn’t be licensed to give you financial advice. So, be sure to do your own digging.
With the legal gibberish out of the way, I’ve come to the conclusion that cannabis could be a good play, but not in Canada. Companies in both the cannabis and hemp/CBD spaces in the United States are presenting compelling opportunities.
With that said, here’s why the bigger Canadian companies don’t offer up nearly the opportunity that smaller, US-based companies do:
Canadian Cannabis Is Overvalued
Plain and simple, there’s no better way to make the argument. Just look at some basic valuation metrics among these big cannabis companies.
- Aurora Cannabis – Aurora Cannabis trades with a price-to-earnings ratio of more than 60 and a price-to-sales ratio of more than 47.
- Cronos – Cronos trades with a price-to-earnings ratio of more than 44 and a price-to-sales ratio of more than 227.
- Tilray – Tilray trades at a loss, creating a negative price-to-earnings ratio that works out to about -28 and has a price-to-sales ratio of more than 32.
- Canopy Growth – Canopy Growth trades at a loss, creating a negative price-to-earnings ratio that works out to about -12 and has a price-to-sales ratio of more than 46.
- Aphria – Aphria trades with a price-to-earnings ratio of more than 22 and there is not enough data available for a good 12 month price to sales ratio.
As you can see, there’s a trend here. Aphria is the only Canadian cannabis company listed here that isn’t grossly overvalued. However, there’s a good reason for this. The company is in the midst of a management shakeup after losing both its CEO and Co-Founder as the result of allegations that the two colluded to create personal gains from an acquisition.
Ultimately, the questionable acquisition cost Aphria shareholders around $50 million and shed light on the poor management of the company. While the company is working to improve their management team as we speak, the stain left by the scandal mentioned above will likely keep the stock’s valuation low for at least the near term.
However, valuations aren’t the only reason to be concerned about Canadian cannabis. The truth of the matter is that all of these companies are working to rapidly expand production. The problem is that the market is only so big. We’ve seen, in some legal regions in the United States, what happens when supply outstretches demand. Flower sits for long periods of time, prices go down and profitability seems out of reach.
With several big players all drastically increasing production, there’s an argument that the market may not be large enough to support the production growth that is expected to take place in Canada over the next few years.
In The United States, The Story Is Very Different
While cannabis was becoming legal in Canada, investment dollars stretched over the border, leaving the United States market largely unnoticed by many. However, it’s important to remember that cannabis in the United States is very different from cannabis in Canada.
In the United States, on a federal level, cannabis is illegal. While there are some states that have legalized the use of the plant as a medicine and some that have legalized it for adult recreational use, most purely cannabis stocks in the region are dependent on national legalization, and for that reason highly speculative.
Nonetheless, there is a sector of the market that is federally legal in the United States. With the passage of the 2018 Farm Bill, the United States legalized the production and sale of hemp and its derivatives, including CBD.
That’s where companies like Veritas Farms (VFRM) come in. While the company is not yet profitable, it is nearing that line. Moreover, it trades with a price-to-sales ratio of around 25, which is lower than any other company on the list above with the exception of Aphria. Then again, Veritas hasn’t been forced into a management shakeup by short sellers picking up on unsavory actions in the c-suite.
While the Canadian cannabis market is already saturated, in the United States, few companies in the CBD space have done well when it comes to commercialization. Veritas Farms is one of those companies.
In fact, Veritas Farms is one of very few companies that has seen success in getting its products on shelves in national big-box retail stores. Featured in stores like CVS, Kroger, and several others, its products can be found in more than 4,500 locations across the United States, with more than 3,500 of these locations being nationally recognized chain drug and grocery stores.
While the company has already amassed an impressive retail footprint, it continues to work to expand further. In emerging markets, those that make moves early tend to be those that lead in the long run, Veritas seems to be on the right track to becoming one of these long term leaders.
The Bottom Line
The bottom line here is a simple one. While cannabis companies in Canada have seen declines as of late, they remain highly undervalued and are operating in a market that is quickly becoming saturated. On the other hand, the US alternative to cannabis, the CBD market is filled with opportunity as market saturation is far from upon us. Moreover, due to heavy interest in overvalued Canadian plays, US companies with strong potential have been starved of investment funds, creating highly undervalued opportunities when compared to Canadian competitors. All in all, investors may want to start looking into options right here at home for the largest long-run opportunities.
Disclosure – The author of this article is not an investment advisor or broker dealer and is not legally qualified to give investment advice. This article should not be considered investment advice, nor a solicitation to invest in any stock mentioned herein. This article is purely informational and provides no warranties associated with forward-looking statements. The author of this article has no positions in any stock mentioned herein. While the author has researched the topics discussed in detail, there can be no guarantee that this research resulted in 100% accuracy in data and therefore, all statements should be validated through your own research. To view all relevant disclosures, click here.