The cannabis sector has been very popular over the last few years, but more so now, as the industry matures, and companies try to turn a profit.
This earnings season, a lot will be made of companies’ operations and what they have done to improve their position in the industry and grow their margins toward profitability.
Over the last few years, the main focus for companies has been to build their operations and capacity, as well as trying to gather as much market share as possible.
Now that the recreational industry has been legal for a year, investors are demanding companies start to show signs of profitability, so that will be the number one thing to watch as companies report their numbers.
Two top cannabis stocks to watch this earnings season are Canopy Growth (TSX:WEED)(NYSE:CGC) and Green Organic Dutchman Holdings (TSX:TGOD).
Canopy Growth
Canopy Growth is the largest cannabis company in the world and by far has the biggest following. Investors may remember from the last earnings season that Canopy’s CEO at the time, Bruce Linton, was ousted due to what the major shareholders and board deemed to be sub-par progress made towards profitability.
Now, after a quarter with a new CEO, it will be interesting to see what progress has been made and how far off Canopy is from profitability.
Although it has a major advantage by being the largest company and having global reach and scale, companies with larger operations also have a disadvantage in that their breakeven point will be higher.
This is because the operations and facilities will be much larger, creating higher fixed costs for the company. The large scale will help eventually when the industry is mature, and it can help drive down costs, but for now it can be a hindrance, because it raises the minimum sales Canopy needs just to break even.
The other thing to pay attention to is Canopy’s edible and derivative offerings, which it has said will be ready for retail sales by the end 2019.
Its stock has come down more than 60% from its 52-week highs, offering investors incredible value that hasn’t been seen for a while.
Green Organic Dutchman
Green Organic Dutchman has been a top cannabis stock to follow because it’s the only certified organic scaled producer in the industry.
In the past, organic cannabis has historically attracted around a 60% premium over regularly cultivated cannabis. It will be interesting to see in TGOD’s numbers, whether that premium is still present or if it’s shrinking.
It will also be good to see the progress TGOD has made with its construction of its main production facility in Ancaster, Ontario. The facility is its first production location that has state-of-the-art equipment and is expected to be completed by the end of the fourth quarter.
Getting an update on its Quebec facility will also be helpful, because it’s significantly larger than the Ancaster facility. Phase 1A is expected to be completed by the end of the year and should bring the company 65,000 kg of total capacity.
Finally, with edibles and derivatives now legal, it will be paramount to get an update on the company’s plans for the new market, which is expected to be a large portion of the recreational industry in Canada.
Bottom line
Each time we get a glimpse into the industries’ operations during earnings season, it paints a clearer picture of the progress the industry is making.
Each company has their own individual progress to track, but investors will be interested in all companies’ ability to produce a profit, and the plans for the future markets that are materializing.
This may be the most important earnings season since legalization last October, so there will be a lot to watch and potentially a tonne of volatility, as investors re-balance their portfolios to the best cannabis stocks in the sector.
