On today’s TSX Breakouts report, there are 45 stocks on the positive breakouts list (stocks with positive price momentum), and 25 securities are on the negative breakouts list (stocks with negative price momentum).
In recent days, several sectors have gained buying interest by investors. Bank stocks are appearing on the positive breakouts list as their share prices advance ahead of the quarterly earnings releases, and lumber company stocks have been gaining momentum given the devastating forest fire activity. In addition, many marijuana stocks have been rebounding after pulling back from peak levels reached in January. Year-to-date, the returns of marijuana stocks have varied widely, many of which have experienced steep declines. However, this cannabis company stands out from many of its peers as it has provided investors with a healthy double-digit gain, and looking forward, the average target price suggests the share price may rally 76 per cent over the next year. Discussed today is The Hydropothecary Corporation (HEXO-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Quebec-based Hydropothecary is a licensed marijuana producer that is undergoing tremendous growth as it prepares for the legalization of recreational marijuana. The company is constructing a 1-million square foot greenhouse, which is expected to be completed in December. Once completed, the company’s annual cannabis production capacity will increase to approximately 108,000 kilograms. The company is aggressively expanding its workforce, growing from 137 employees as at April 30 to its present level of more than 200 employees, and targets employing more than 500 by December. The company will supply the recreational market under the brand name HEXO, while the medical marijuana market will continue to be served under the Hydropothecary brand name. Aligning itself with its new recreational brand name, management plans to change the corporation’s name to HEXO Corporation from The Hydropothecary Corporation.
Earlier this month, the company announced it had entered into a joint venture agreement with Molson Coors Canada, a leading manufacturer of beer, to develop and manufacture marijuana-infused, non-alcoholic beverages. HEXO’s chief executive officer Sébastien St. Louis remarked on this new partnership stating in a news release, “As two leading companies who share a track record of excellent practices, as well as respect for law and regulations, HEXO and Molson Coors Canada have established a relationship built on trust, and together we will develop responsible, high‐quality cannabis‐infused beverages for the consumable cannabis market in Canada.”
Management believes the company has a competitive cost advantage given it has greenhouse facilities and electricity rates in Quebec are low compared to its industry peers with operations located in Ontario. In the third-quarter of fiscal 2018 (the company’s fiscal year-end is July 31), the weighted average cash cost per gram was 88 cents, down from $2.06 realized during the same period last year.
In April, the company signed a five-year escalating supply agreement with the Société des alcools du Québec (SAQ). In Quebec, the SAQ will be responsible for the distribution of recreational cannabis through a newly created subsidiary, the Société québécoise du cannabis (SQDC). Once recreational marijuana is legalized, HEXO will supply the SQDC with 20,000 kilograms of marijuana in the initial year, ramping up to 35,000 kilograms in the second year and 45,000 kilograms in the third year.
In management’s discussion and analysis report released at the end of June, the company expanded on its growth objectives stating, “Based on the current agreements signed between the SQDC and five other licensed producers, we obtained the highest Year 1 volume, representing approximately 34 per cent market share within the province of Quebec, and we are aiming to remain the largest supplier in subsequent years. Our top priority in Year 1 of the adult recreational market is to serve the Québec market and to make a strategic entry into other Canadian markets such as Ontario to position for full-scale supply to that market when production comes on line. As we execute on our relationship with SQDC and enter Ontario, we will also engage with authorities responsible for cannabis distribution and retail in Alberta and British Columbia to open additional markets for our brand.”
Dividend policy
The company does not pay its shareholders a dividend.
Analysts’ recommendations
There are seven analysts who cover this small-cap marijuana stock with a market capitalization of $931-million and all seven analysts have buy recommendations. More specifically, four analysts have ‘buy’ recommendations and three analysts have ‘speculative buy’ recommendations.
The stock has analyst coverage from the following firms in alphabetical order: Beacon Securities, Canaccord Genuity, Cormark Securities, Echelon Wealth Partners, Eight Capital, GMP Securities and PI Financial.
Revised recommendations
Earlier this month, Russell Stanley, the analyst from Echelon Wealth Partners, increased his target price to $7.25 from $6.75. In addition, Doug Cooper from Beacon Securities boosted his target price to $12.50 from $9.50. Matt Bottomley from Canaccord Genuity lifted his target price to $7.50 from $6.50. Analyst Devin Schilling from PI Financial raised his target price by 50 cents to $9.
Financial forecasts
Robust growth is anticipated over the upcoming years for this company. The Street is anticipating the company will report revenue of $113-million in fiscal 2019, $283-million in fiscal 2020 and $443-million in fiscal 2021. The consensus EBITDA (earnings before interest, taxes, depreciation and amortization) estimates are $23-million in fiscal 2019, $107-million in fiscal 2020 and $226-million in fiscal 2021. In terms of earnings per share, the Street is anticipating the company will report 5 cents in fiscal 2019 and 37 cents the following fiscal year.
Over the past several months forecasts have moderated slightly. To illustrate, three months ago, the Street was anticipating revenue of $117-million for fiscal 2019 and $295-million for fiscal 2020, and the consensus EBITDA estimates were $25-million for fiscal 2019 and $115-million for the following fiscal year.
Valuation
The stock can be valued on an enterprise value-to-EBITDA multiple basis. According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 6.4 times the fiscal 2020 estimate.
The consensus one-year target price is $8.50, implying the stock price may appreciate 76 per cent over the next 12 months. Target prices range from a low of $7.25 (from the analysts at Echelon Wealth Partners and Eight Capital) to a high of $12.50 (from the analyst at Beacon Securities). Individual target prices are as follows in numerical order: two at $7.25, two at $7.50, $8.50, $9 and $12.50.
Insider transaction activity
Several insiders have been recent sellers in the market.
Most recently, on Aug. 15, the company’s chief financial officer Ed Chaplin sold 3,200 shares at an average price per share of approximately $4.51, reducing his portfolio’s holdings to 33,000 shares.
Prior to that, on July 13 and July 14, co-founder and chief executive officer Sébastien St. Louis exercised his options and warrants, and sold the corresponding number of shares received (429,168) at an average price per share of approximately $4.20, leaving 219,498 shares in his personal account. The CEO hold 3,546,198 shares in an account for which he has indirect ownership (8375739 Canada Inc).
On July 13, co-founder and chief brand officer Adam Miron exercised his options and sold the corresponding number of shares (525,000), eliminating this account’s position. Mr. Miron has indirect ownership in another account (No. 2 Mission Row Inc.) that holds 3,355,916 shares.
Chart watch
So far this year, the returns of marijuana stocks have varied widely. However, this stock is among the outperformers. Shares of Hydropothecary have delivered respectable gains to investors.
Amongst the top performers are Canopy Growth Corp. (WEED-T), OrganiGram Holdings Inc. (OGI-X), and Hydropothecary Corp. (HEXO-T) with returns of 65 per cent, 28 per cent and 18 per cent, respectively.
Among the laggards are Emblem Corp. (EMC-X), Emerald Health Therapeutics (EMH-X), Aphria Inc. (APH-T), Aurora Cannabis Inc. (ACB-T) CannTrust Holdings Inc. (TRST-T) and Cronos Group Inc. (CRON-T) with losses of 47 per cent, 39 per cent, 39 per cent, 21 per cent, 10 per cent, and 0.2 per cent, respectively.
Looking at key resistance and support levels, shares of Hydropothecary have initial overhead resistance around $5.50, near its all-time closing high of $5.39 set back on June 22. Looking at the downside, the stock has strong technical support around $4, close to its 200-day moving average (at $4.15).
This small-cap stock is quite liquid. The three-month historical daily average trading volume is approximately 3.3-million shares.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Jennifer Dowty