You cannot go anywhere it seems without hearing about cannabis stocks and all of the world’s problems that these businesses will solve.
Some of the claims you hear are true, others have merit, while some are likely nothing more than hype. As the new industry develops, it creates a bit of a “blue sky” thinking, and, in turn, can lead to some frothiness in many investment opportunities in the space. Look no further than Tilray Inc., traded in the U.S., since it went public or the general volatility in almost any company in the space.
For many, the volatility and valuations of most of the publicly traded cannabis companies is too much to stomach. Fortunately, there are other ways an investor with a longer-term outlook can seek to gain exposure to the cannabis space without taking on gut-wrenching volatility.
Alcanna Inc. (CLIQ-T)
Alcanna was previously named Liquor Stores NA (LIQ), but this all changed once Aurora Cannabis Inc. (ACB-T) invested in the company, taking a 25-per-cent ownership position. Alcanna will now use the proceeds from this investment from Aurora, as well as their expertise from operating retail liquor outlets, to expand a retail cannabis footprint in Canada. While it is nice that CLIQ has a bit of an anchor business through liquor sales, revenues have been declining from a high of $817-million in 2016 to $621-million in 2017. The company hopes that the shift and diversification into a new and higher growth market will reinvigorate sales.
Why Alcanna is on the move
While it is hard to pin a specific reason for the strength, there are numerous things an investor could point to.
As legalization approaches and interest in the space continues to grow, it would make sense that markets are starting to pay closer attention to the companies that are distributing the products to the end customer. The opening up of retail markets in Ontario is also likely to be a contributor to the performance, as more open markets mean a larger potential customer base that could frequent Alcanna’s stores and also provides an opportunity to diversify out of Alberta.
Some speculative risks still exist as these stores are not yet running, but this is a risk with the whole industry currently. The nice thing about CLIQ for investors just now looking to gain exposure to the industry is that with shares trading at 0.6 times next year’s sales, it is nowhere near as highly valued as some of the producers that are trading as much as 20 times forward sales.
Shopify Inc. (SHOP-T)
Shopify is one of Canada’s tech darlings, and if the TSX had a ‘FAANG’ acronym, SHOP would be part of it.
The company essentially creates a digital storefront for businesses where they can process transactions and sell goods while offering other complementary services where applicable. Interestingly, over 70 per cent of revenues come from the U.S. as of year-end 2017. While the cannabis exposure for Shopify is less direct, they are carving themselves a footprint for processing online cannabis related transactions by signing deals with many provincial governments such as B.C. and Ontario and even some producers. While the Canadian piece is unlikely to move the needle a whole lot, at least in the short-term, there could be longer-term potential through legalization across the border if SHOP is able to establish itself as the go-to name for processing and managing sales.
Why SHOP is on the move
Having sold off back in July with many tech stocks, SHOP is now climbing back to near its 52-week high with the help of stronger markets. For an investor looking for a way to have exposure to cannabis stocks without the ups and downs, Shopify might not be that company. The valuation is a bit loftier at 11.6 times sales and shares are volatile any given day. The nice thing about Shopify, is that if growth in cannabis does not pan out for them, they will continue to do fine without it. In other words, SHOP might be able to see more growth from the cannabis space over the long-term but does not need to succeed in the space to survive.
Andrew Peller Ltd. (ADW.A-T)
Andrew Peller is a wine producer in Canada with brands many may be familiar with, such as Trius and Peller Estates. While this company currently has no exposure to the cannabis sector, those familiar with the investment Constellation Brands Inc. (STZ-N) made in Canopy Growth Corp. (WEED-T) and overtures from other liquor companies such as Diageo, it is probably safe to think that ADW is thinking hard about whether they should get involved in the industry. In fact, in the recent conference call, the management team noted that they are monitoring developments in the industry and any opportunities that may exist. While whether the company invests in the cannabis sector at all is highly speculative, an investor still gets to own a wine company with great products, brands, and a strong market position within Canada.
Why ADW is on the move
Unlike the other two above mentioned names, ADW is actually seeing weakness currently. However, with the shares being up nearly 35 per cent over the last year compared to the TSX up 2.9 per cent, some weakness is warranted. Overall, ADW offers an interesting mix of stability, dividends and a justifiable valuation which can be tough to find in the cannabis space. Of course, the catch here is that this company may never get involved in the industry. Fortunately, the underlying business at ADW is sound and growing into new markets can always be a lever they pull on down the road.
With many of the cannabis stocks trading on the TSX, it can be tough to square the valuations with the fundamentals that most of these names hold. Things may or may not work out well for the companies going forward but the one thing an investor can be sure of is that at the valuations the space is trading at, there will be a lot of volatility. If that is not something an investor wants in their portfolio, there are some other ways one can gain exposure to the space over the long-term while owning diversified businesses with more of an operating history. Not all of these names are “perfect,” but they offer an alternative to consider for those less eager to jump in to the waters head first.
Disclosure: The writer holds no positions in the above-mentioned stocks. In order to remain conflict-free, employees of 5i Research cannot trade in Canadian stocks.
Ryan Modesto, CFA, is CEO at 5i Research, a conflict-free investment research provider for retail investors offering research reports, model portfolios and investor Q&A, which is available to try for free. 5i Research provides content under an agreement with The Globe and Mail, which receives royalty compensation.