As Friday’s trading session drew to a close, rumors began to swirl about Canadian licensed cannabis producers circling the damaged assets of CannTrust Holdings Inc.
With ongoing investigations by the Ontario Securities Commission, Health Canada, and the country’s criminal investigative unit, the Royal Canadian Mounted Police, weed companies are betting that one or all of the probes will leave CannTrust CTST, +4.13% a broken company with production assets that can be snatched up at garage sale prices.
Earlier Friday, Bloomberg News reported that Aphria Inc. Chief Executive said his company was eyeing the bloodied bits of the company and investors on social media also said Supreme Cannabis Co. and Aleafia Health Inc. were also in the mix of companies looking to make an acquisition. Supreme Cannabis and Aleafia Health did not immediately return several calls requesting comment.
Aphria U.S.-traded shares closed up 41% Friday to lift the broader cannabis sector, after the Canadian company posted a surprise profit for its fourth quarter and offered upbeat guidance for fiscal 2020.
Aphria APHA, +40.96% APHA, +40.14% said it had net income of C$15.8 million ($11.9 million), or 5 cents a share, compared with a loss of C$5 million, or 43 cents a share, in the year-ago period. Sales rose more than tenfold to C$128 million from $12 million a year ago.
The company said it expects fiscal 2020 revenue net of excise taxes of C$650 million to C$700 million. There are no reliable FactSet estimates for the company, but GMP said the numbers and outlook were strong and reiterated its buy rating on the stock.
Analyst Justin Keywood said a government contact at the distribution level had offered “very positive feedback” on Aphria in a recent call.
“The quality of Aphria’s products was mentioned as one of the best among all LPs and our contacts also said the company has greatly improved operationally,” the analyst wrote in a note to clients. “We also heard there were strong efforts from Aphria to improve relationships with its partners and distributors following the transition last year.”
Jefferies analyst Ryan Tomkins agreed. “In the context of poor sector sentiment, profitability becoming an increasing focus, and guidance scarce, this print is very reassuring and supports our conviction in the name,” he wrote in a note to clients. Tomkins also rates the stock as buy.
Aphria Chief Executive Irwin Simon told MarketWatch the company’s success is partly due to efforts to keep growing costs low. It helps that marketing costs are minimal, given Canada’s strict laws on promotion. But the company also benefited from C$50 million it received from Green Growth Brands Inc. GGBXF, +4.75% GGB, +0.00% after that company’s hostile takeover bid failed. Green Growth launched the bid after short-sellers released a report that called into question several of the company’s assets and pointed out alleged wrongdoing by former executives related to several acquisitions.
For more on that story, see: Cannabis company Aphria finds some board members had conflicts in Latam deal
Aphria said it will receive another C$39 million in November from Green Growth.
For more on this, read: Aphria CEO says $1 billion black market for vapes is its largest competitor
Cronos shares CRON, +8.72% CRON, +8.46% rose 8.7%, after the company said it is acquiring four subsidiaries of Redwood Holding Group LLC, a maker of hemp-derived CBD-infused skin care and other products, for $300 million in stock and cash.
Redwood was co-founded in 2017 by Robert Rosenheck and Cindy Capobianco, who will join Cronos and continue to lead their platform. Under the terms of the agreement, Cronos will pay $225 million in cash and the balance in newly issued stock. It will fund the cash portion of the deal with cash in hand. Tobacco giant Altria Inc. MO, +0.10% has invested $1.8 billion in Cronos, acquiring a 45% stake.
Tomkins of Jefferies said the deal works in a number of ways.
“First, it’s putting their large cash pile to work,” he wrote in a note to clients. “Second, it gives exposure to the worlds biggest market. Third, it appears strategically astute. We’ve argued for a while that unless FMCG (fast-moving consumer goods company) or an already established CBD brand, it will likely be difficult to penetrate.”
However, with Cronos stock still trading at premium over its peers, Tomkins is sticking with an underperform rating: “We think investors seeking safety in the large cash pile and also taking the Altria investment as validation of a superior business model,” he wrote. “With cash not a source of long term value in itself, and the model yet to be proven (we don’t say it won’t), we think valuation is too rich at these levels.”
Cronos CEO Mike Gorenstein also co-founded Gotham Green Partners, which owns stock in Redwood Holding Group and Cronos itself.
Cannabis Watch: For more of MarketWatch’s coverage of cannabis companies
Sundial Growers Inc.’s stock SNDL, +23.23% closed up 23%, recouping part of the 30% loss suffered Thursday on its first day of trading on Nasdaq. The Canadian licensed producer priced its initial public offering at $13 a share. The company had losses of C$16.7 million, or 24 cents a share, in the March quarter, with revenue of C$1.7 million.
Renaissance Capital, a provider of institutional research on IPOs and IPO ETFs, said the three things investors need to know are: “1.It has two facilities in Alberta with annual capacity of 60 million grams and is adding a new facility in British Columbia to reach total annual capacity of 95 million grams; 2. Canada’s recreational cannabis market is expected to reach US$4.8 billion by 2024; and 3. Unprofitable and levered; expansion will require significant capex.”
Elsewhere in the sector, market leader Canopy Growth CGC, +4.91% WEED, +4.55% closed up 4.9%, Tilray TLRY, +7.16% closed up 7.2%, and MedMen shares MMNFF, -0.65% were down 0.7%. OrganiGram Holdings’s stock OGI, +2.12% closed up 2.1%. Aurora Cannabis ACB, +8.21% ACB, +7.84% closed up 8.2%.
The ETFMG Alternative Harvest ETF MJ, +4.85% was up 2%, with 23 of its 38 component stocks higher. The Horizons Marijuana Life Sciences ETF HMMJ, +6.89% firmed 3.6%, with 29 of its 54 components higher.