Even before the legalization of marijuana in Canada in 2018, cannabis companies were busy investing billions of dollars in facilities to meet implausible demand projections, as well as acquiring their competitors at inflated prices. Looking back, the entire series of events placed the foundation for a…
catastrophe in the sector. Indeed, the Horizons Marijuana Life Sciences ETF (TSX:HMMJ), an index that tracks the performance of sector constituents, is now down nearly 80% from all-time highs.
Now that the bubble has burst, investors have opportunities to do the previously unthinkable — buy top marijuana stocks at a great value. Today, let us look at two companies in this category and how they can reignite their momentum for long-term growth.
HEXO (NYSE:HEXO) is a weed producer that grossly miscalculated the demand for marijuana but quickly improvised to overcome its headwinds. The company focuses mainly on three production aspects — high-quality cannabis (greater than 20% THC content), value brands, and mass production of low-grade cannabis to squeeze out competitors in the black market. So far, HEXO has a leading market share of 33% in Canada’s second-most populous province, Quebec.
In the first nine months of fiscal 2020, HEXO nearly doubled its gross revenue year over year, from CA$38.7 million to CA$74 million. That’s even though the company sold a mere 25,427 kilograms out of its current annual production capacity of 90,000 kilograms of cannabis in the past four quarters.
As a result of this supply-demand mismatch, HEXO recognized a massive write-off of CA$111.9 million in goodwill and CA$42 million in unsold inventory, and took CA$106.2 million worth of asset impairments in January. Such non-cash losses did not continue into the third quarter.
Right now, the company has about CA$27.3 million in long-term debt and CA$48.7 million in convertible note liabilities, which is more than cushioned by its CA$94.3 million in cash and CA$17.4 million in investments. Despite its resilience, the stock is trading for only 3.4 times price-to-sales and 0.8 times price-to-book-value. As icing on the cake, HEXO expects to generate positive operating income less non-cash adjustments (EBITDA) by the end of the first half of 2021.
Like HEXO, Aphria (NASDAQ:APHA) is also trading for rock-bottom valuations — in its case, 2.7 times price-to-sales and 0.93 times price-to-book value — despite growing its revenue by more than 100% in its 2020 fiscal year. The company’s sativa, indica, CBD oil, and other products won seven Canadian Cannabis Awards last year.
In addition, the company also has a…
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