This U.S. Hashish Firm Is What Changed Cover Development in My Portfolio

D.Deciding when to buy or sell stocks can be a difficult decision for some investors. This has likely been the case for those investing in the cannabis market, where the predicted future market leaders may not have reached their full potential three years ago and alternative choices like better long-term games appear over time.

In 2018 Canada started the legal sale of recreational cannabis. The hype before and just after the launch sent stocks like Canopy growth (NASDAQ: CGC) skyward towards $ 50 per share. Since then, inventories have built up, profits have not been met, and stock prices have fallen. Cannabis is now legal for recreational use in 19 states, and operators from several states are generating record quarterly revenues that support positive income on the balance sheet. Could this mean it is time to move your Canadian business cannabis investments to US businesses?

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Three years of legal sales and still no profit

Some of you may think that three years with no profits isn’t that long, so why get out now? While Canopy can still claim to be Canada’s No. 1 market share in premium flowers, market share has declined 310 basis points. It also maintained its # 2 ranking in Value Flower market share but saw a 540 bps drop.

In the second quarter of FY 2022, which ended Sept. 30, dried flowers were Canopy’s largest revenue generator at $ 56.8 million in the recreational cannabis market, but declined 11% year over year. If the company continues to decline like this, it will be an uphill battle to overcome. This could lead to additional sales and marketing expenses to reclaim the flower share or to break into Cannabis 2.0 forms – vapes, topicals, edibles, and beverages – which together account for just $ 9.2 million of quarterly revenue in the recreational cannabis market Turn off the canopy.

The company identified increasing competition in the value flower category as the main reason for the decline. Above all, Auxly cannabis group and organization chart both doubled their market share in the third quarter of this year.

Canopy’s loss of market share was due to a 13% decline in revenue for the quarter year over year. The decline in sales resulted in an adjusted EBITDA loss that doubled the previous year’s loss in the second quarter of the fiscal year due to lower sales and a negative gross margin of 54%. These results turned the stock into a whack-a-mole, crushing up to 14% in one day on November 5th.

Cantor-Fitzgerald analyst Pablo Zuanic cut his 12-month target price on Canopy not just once, but twice in a few months, possibly as a foreshadowing of what was to come in the Q2 report and beyond. In September the number was reduced from 24 US dollars to 17 US dollars and again to 14.90 US dollars in November after the profit was released. That price target was reflected by Barclays ($ 14) on November 18 and rated the company as equilibrium. The share price is currently around $ 13 and has lost over 75% since its 52-week high of $ 56.50. Meanwhile, its current earnings per share are at a loss of $ 2.74.

Profits may continue to fall at some point, but towards the end of the year I decided to take my losses now and offset some of my other portfolio gains for tax purposes. In the meantime, I can get on with a multi-state operator who I believe will help make up for those losses in less time than sticking to Canopy. I can still do this without straying too far from my rule of sticking to a stock for three to five years.

One cannabis operator ranks above the other in terms of leadership

Another top rule that many successful investors follow is to ensure that the companies they invest in have strong leaders who can drive innovation and market growth, and provide positive returns for investors. And if a company like Cresco Labs (OTC: CRLBF) honored as the top cannabis operator on Inc. magazine’s prestigious list of 250 best-run companies (No. 74 overall), this makes the decision to swap portfolios much easier.

Cresco is a vertically integrated, multi-state operator headquartered in Chicago, with a broad US presence, supported by operations in 10 states and nine different brands. Recognized by some cannabis industry websites as “well worth consumer attention” and “a go somewhere company”, Cresco has achieved success on the basis of quality.

Cresco grows its products domestically and has full control over the quality and supply chain. The primary focus on US markets with high demand and reliance on quality should allow the company to manage inventory well while increasing sales – high quality products and a strong brand create demand, resulting in minimal waste of inventory.

It is also possible that Cresco’s high quality products are attracting the attention of government researchers. The provisions of the latest infrastructure law allow researchers to study consumer products from local pharmacies instead of just using government-grown cannabis.

In addition to being considered a best-run company, Cresco is the top-selling cannabis brand in the United States, with Cresco Cannabis leading in both its home state of Illinois and Pennsylvania. In its Q3 report, this was reflected in sales of 215 million. Record sales resulted in Adjusted EBITDA increasing 24% to $ 56.4 million, and gross profit margin is expected to reach 50% for the remainder of the year. As a reminder, Canopy’s gross profit margin for the second quarter of FY2022 was -54%.

A simple portfolio swap

Some investors see the decline in Canopy’s stock price as the ultimate buying opportunity in the slump – more like a La Brea sinkhole – opportunity in the Canadian cannabis market. But for me, I’m walking down the path of a more promising prospect from a best-run company with a quality product that doesn’t rely on government legalization to make money in the emerging US market.

Also, it doesn’t hurt that the same respected analyst who slashed their price target on Canopy posted a price target on Cresco ($ 19) with the potential for a 100% gain above its current share price of just over $ 9. That offers an investment in Cresco Labs that led me to replace Canopy in my portfolio.

Here is the marijuana stock you’ve been waiting for
A little-known Canadian company has just figured out what some experts believe could be key to capitalizing on the coming marijuana boom.

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Cannabis legalization is spreading across North America – 15 states plus Washington, DC have legalized all recreational marijuana in recent years, and full legalization came to Canada in October 2018.

And a Canadian company that’s under the radar is about to explode from this coming marijuana revolution.

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Learn more

Jeff Little owns stocks in Auxly Cannabis Group, Cresco Labs Inc., and OrganiGram Holdings. The Motley Fool owns shares of and recommends Cresco Labs Inc. and OrganiGram Holdings. The Motley Fool recommends the Auxly Cannabis Group. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.