3 marijuana stocks trading below their book value
Last year was supposed to be a stock-out year for marijuana stocks. The stage seemed set for much of the industry to move towards profitability. Canada was selling weed for adult use and higher margin derivatives were due to hit dispensary shelves later in the year. Meanwhile, the legalization momentum in the United States has remained strong, raising hopes that pot sales will continue to soar.
Unfortunately for investors, none of this materialized. In fact, supply issues continued to persist in Canada, with the official launch of high margin derivatives delayed until mid-December. Then in the United States, high tax rates in some states (ahem, California) made it virtually impossible for legal retailers to compete with black market producers. As a result, marijuana stocks were crushed in 2019.
One of the most interesting effects of this precipitous drop can be seen on the book value of jar inventories. While book value isn’t exactly a valuation metric that cannabis investors should pay a lot of attention to, the mere fact that three marijuana stocks are now trading below their book value is sure to lift. a few eyebrows and grab the attention of valuable researchers. . Of course, as you’re about to see, there are some pretty good reasons why those below book value pot stocks aren’t necessarily a good deal.
Aurora Cannabis: Price per pound of 0.64
The first stock of marijuana that has fallen well below its book value is Aurora Cannabis (NASDAQ: ACB). After dropping more than 50% in 2019, the world’s most popular pot stock is now worth only 64% of its book value. But make no mistake: Aurora Cannabis is no big deal.
At the end of Aurora’s first fiscal quarter, ended September 30, the company had C $ 5.61 billion in total assets. However, CA $ 3.17 billion of this amount was recorded as goodwill, and an additional CA $ 683 million was classified as intangible assets. In another context, nearly 70% of the company’s total assets are based on hope and promise, it is rather a recipe for disaster.
The biggest problem for Aurora Cannabis is that it appears to have overpaid for its more than a dozen acquisitions since August 2016. The most egregious of these deals is the 2.64 billion Canadian dollars paid to acquire MedReleaf. With the Exeter facility now on sale – Exeter is a vegetable growing greenhouse that was supposed to be refurbished to produce at least 105,000 kilograms of pot per year – the costly C $ 2.64 billion deal does allowed Aurora to gain only 35,000 pounds of output and branding from MedReleaf. It’s massive depreciation waiting to happen.
Additionally, Aurora Cannabis does not appear to achieve operating profitability in fiscal 2020, and the company may struggle to meet its existing debt repayment obligations, according to some people on Wall Street. Although it trades below its book value, Aurora Cannabis is most definitely a jar stock to be avoided.
iAnthus Capital Holdings: accounting price of 0.6
It is important to realize that the book values ââof jar stocks are also low in the United States. Vertically integrated multistate operator iAnthus Capital Holdings (OTC: ITHUF), which is present in 11 states and 30 open dispensaries, is priced perhaps the lowest of any marijuana inventory. However, as with Aurora Cannabis, bad negotiation seems to be its downfall.
In February, iAnthus Capital entered into what would, at the time, be the largest marijuana deal in the United States in history. Unfortunately, the all-equity acquisition of MPX Bioceutical is responsible for the majority of the $ 440.4 million in goodwill (i.e. in US dollars) that the company carried on its balance sheet at the end of September. For context, iAnthus’ goodwill is 55% greater than the company’s current market capitalization, and it represents 53% of its $ 831.6 million in total assets.
And it’s getting worse and worse. Like Aurora, iAnthus has a large portion of its total assets classified as intangible assets – $ 177.5 million, to be exact. This means that 74% of the company’s total assets are built by crossing our fingers and hoping everything goes according to plan.
While iAnthus is well positioned in a handful of US states and is expected to see sales increase significantly in 2020, it’s hard to ignore the high likelihood of depreciation in the not-so-distant future.
CannTrust Holdings: accounting price of 0.85
Last, but not least, the struggling marijuana stock CannTrust Holdings (OTC: CNTTQ) is valued at only 85% of its book value. While that too may sound like a big discount, there are a number of reasons behind CannTrust’s bottom feed valuation.
On the one hand, the company admitted in July to illegally cultivating marijuana in five unlicensed theaters for a period of six months (October 2018-March 2019). This admission ultimately led to the sacking of former CEO Peter Aceto, the destruction of $ 58 million in illicitly grown pots, and the suspension of the cultivation and sale license by Health Canada in September. This suspension leaves the door open for CannTrust to reclaim its licenses this year, but at this time the company is unable to grow any new crops or sell any product.
Additionally, CannTrust has not released any of its operating results since May of last year. The company having been caught in the act of illicit growth, its previous income statements will have to be restated. It could take until the end of the first quarter of this year before the company releases any of its previous results. As a result, the company’s book value could turn out to be very different from the data we currently have.
While I see CannTrust as a very risky buy for the second half of 2020, its unusually low book value plays no role in this belief.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.