Investors are taking a closer look at a pair of lesser-known cannabis stocks recently backed by Toronto-Dominion Bank in hopes of finding the next best bet in the marijuana market.
TD gave clearance for its investment advisers to recommend Emblem Corp. and Emerald Health Therapeutics Inc., which analysts and the companies’ executives believe is in part because they aren’t involved in the legally murky U.S. cannabis market. The two TSX Venture Exchange-listed companies also believe their strong operations and more modest valuations, compared with peers’, may have helped.
Advisers at TD Wealth Private Investment Advice also received approval to recommend a third stock, Canopy Growth Corp., Canada’s largest publicly traded producer. At the same time, the bank has instructed advisers not to recommend dozens of marijuana stocks and the four Canadian-listed cannabis ETFs by adding them to its list of non-approved securities.
The recent nod for Canopy, Emblem and Emerald doesn’t appear to have immediately benefited the stocks. All three have traded relatively flat since the recommendation was reported by The Globe and Mail on Monday.
Cannabis stocks have plunged in recent weeks, following a run-up in December and January, amid concerns about regulatory changes in the United States where marijuana is legal in many states but illegal federally. Canadian companies with U.S. cannabis assets are considered riskier after U.S. Attorney-General Jeff Sessions said he will rescind an Obama-era policy that limited how federal prosecutors would investigate state-licensed marijuana operations.
Shares of Toronto-based Emblem – which has a production facility in Paris, Ont., and recently signed supplier agreements with Shoppers Drug Mart and retail brand Fire & Flower – have slumped by about 60 per cent from its high of $3.35 on April 11, 2017. Among four analysts that cover the stock, two have a “speculative buy” and two a “hold,” with an average target price of $2.25, which implies a return of about 73 per cent from its current level around $1.30. Victoria-based Emerald, which has a production joint venture with Village Farms International Inc. and retail collaboration with Namaste Technologies Inc., hit a high of $9.68 on Jan. 23 and has since fallen by about 58 per cent to around $4.10. Emblem currently has no analyst coverage.
Bruce Campbell, portfolio manager at StoneCastle Investment Management, has owned both Emblem and Emerald in the past. Emblem is once again “on the radar screen,” and “does look attractive,” he said, citing in part its new chief executive officer, Nick Dean, who joined in December. Mr. Dean’s background is in consumer marketing, including with pharmaceutical and health-care brands.
Mr. Campbell sold Emerald when cannabis stocks ran up in December and January. “It seemed to get ahead of itself based on relative valuation.”
Emerald executive chairman Avtar Dhillon said in an interview the TD recognition was likely due in part to the company’s decision to stay outside of the United States. However, he said he believes it was also because of the company’s experience in the life sciences, public markets and working in strict regulatory environments.
“If we had a particular bias in the industry it’s that we are a very scientifically-based organization and very familiar with federal regulations,” said Mr. Dhillon, a former CEO at Nasdaq-listed Inovio Pharmaceuticals Inc. He also points to Emerald’s partnership with Village Farms and their co-owned Delta 3 greenhouse operation, which recently received a cultivation license from Health Canada, as positives for the stock.
Mr. Dhillon said the TD recommendation validates the company’s work to date and that “we will be a major force in the Canadian market and as we expand globally that we are a good bet. If someone is looking at it from an investment perspective, perhaps we aren’t valued fully yet at our capabilities.”
Mr. Dean of Emblem said the TD plug was a “pleasant surprise,” which has helped to raise awareness for his company. He believes the bank recognizes it as a “safe” investment opportunity in the sector and as a stock that’s undervalued.
“Our market valuation is modest compared to our peers and not reflective of the business fundamentals we have established,” he said in an interview.
Emblem trades at 9.1 times EV/EBITDA, according to analyst consensus estimates for fiscal 2019, versus 39.2 times for Canopy and 23.7 times for Aurora. For the top 17 cannabis companies with analyst coverage, the average analyst consensus is 15.1 times EV/EBITDA for 2019.
Emblem may also be an attractive takeover target, but Mr. Dean said “at the moment, we aren’t actively pursuing being acquired. … If someone came along with an offer we’d explore it, but there is no appetite at the moment for us to be sold from my perspective or the board’s perspective. We believe we have a strong company and want to build this company independently.”
Echelon Wealth Partners analyst Russell Stanley says both Emblem and Emerald could be appealing takeover candidates, especially as their stocks have fallen in recent weeks alongside those of other cannabis companies.
“To see it come back down is a healthy retracement back to more appropriate levels,” says Mr. Stanley, who has a “speculative buy” on Emblem and $2.50 price target. “Multiples were just way too high for people to stomach.”