On August 15, 2018, Constellation Brands (NYSE:STZ), the maker of Corona and Modelo beers, threw the investment community for a loop by sinking another US $4bn into Canadian cannabis company Canopy Growth (NYSE: CGC). As you would expect, Constellation’s industry-validating investment sent shares of other major cannabis players soaring.
And while many smaller players also saw their shares rise, most aren’t nearly as overbought as their multi-billion-dollar counterparts fortunate enough to be listed on the Nasdaq or NYSE.
Now, while larger companies are often assumed to be safer investments, investors actively trying to unearth new opportunities in the Cannabis space should focus their efforts on the lesser known, and potentially undervalued players in the industry.
An under-the-radar opportunity
Ontario-based CannaRoyalty Corp (OTCMKTS:CNNRF) is a US$200mln company that’s flown under the radar of many cannabis investors because unlike most Canadian operators, CannaRoyalty has opted to focus the bulk of its attention outside its country of origin, in California.
Since 2014, when Marc Lustig founded CannaRoyalty, the company has been known as an integrated investor and operator in the legal cannabis sector. The company initially set out to build and support a diversified portfolio of cannabis assets ranging from intellectual property (research) and brands to manufacturing and distributions.
Over the past three to six months, however, CannaRoyalty has begun to evolve. The company now provides the following the following description of its business:
“CannaRoyalty is a North American cannabis consume product company currently focused on building a leading distribution and manufacturing business in California, the world’s largest regulated cannabis market. By building a world-class logistics platform and supporting contract manufacturing assets, the Company intends to support the growth of both new and established cannabis brands. The company’s long-term focus is on building and supporting a diversified portfolio of branded cannabis consumer products, focused in California.” [emphasis my own]
Image source: CannaRoyalty Investor Presentation
In an interview with Pot Network earlier this year, Lustig had this to say about his decision to focus on the California market:
“People do need to keep in mind some of the basic stats. California as a medical market in 2017 did roughly U.S. $3 billion legal revenues. To put that in perspective, for the Canadian market may have been C$250 million - C$300 million. The California market is 10 to 15 times bigger than the Canadian market yet the investment value of a number of the public companies in Canada would suggest that Canada is bigger. But it’s a fraction of the size of the California market. That explains why we’re so focused on the California market.” [emphasis my own]
The bottom line is CannaRoyalty believes only the most superior cannabis products and brands will thrive and survive in the global cannabis market over the long term. And those brands, in the company’s view, are going to call California home.
So, CannaRoyalty, under its funder Marc Lustig’s leadership, is doing everything it can to ensure that it is the go-to name in California cannabis distribution.
Record financial results
CannaRoyalty reported its second quarter 2018 earnings on August 23, and the results were nothing short of extraordinary.
Q2 2018 Highlights:
- The company reported 2Q 2018 revenues of C$3.5mln as compared to C$960,157 for 2Q 2017, or year-over-year growth of 266%
- Net income for 2Q 2018 of C$9.3mln as compared to a net loss of C$2mln for 2Q 2017
- 2Q 2018 Adjusted EBITDA income of CAD 11.1 million as compared to a loss of C$1mln for Q2 2017.
- 2Q 2018 net income per diluted share of C$0.17 as compared to a net loss of C$0.05 for 2Q 2017
When the company hosted its earnings conference call on August 23, CannaRoyalty CEO Marc Lustig had this to say:
“Q2 represented an inflection point where the early investments we made in the legal U.S. cannabis markets met the distribution and brand strategy we initiated in Q3 of last year to drive revenue up 446% from Q1 and a bottom line of $0.18 per share. And this is only the beginning of a period of sustained revenue growth for CannaRoyalty.
“We expect to see a parabolic step change in revenue growth moving into Q3, Q4 and beyond as we integrate FloraCal and River Distribution and continue to drive organic growth through our supporting distribution, manufacturing and value-added service platform. Both of these companies are performing above expectations.” [emphasis my own]
A strong stock getting stronger
Like most cannabis stocks, CannaRoyalty’s stock sold off sharply during the first few months of 2018. But unlike many names that continued to slide after the first quarter 2018, CNNRF found support between US$2.7 and $3 and attracted a new wave of buyers.
The recent uptick in cannabis stocks has pushed CNNRF to a new all-time closing high, but unlike the larger companies in the space, CannaRoyalty’s stock is not terribly overbought. If dip buyers remain active in the US$3.5 to $4 range on subsequent dips I’d look for an eventual break above US$4.5 and bullish continuation toward US$7.5.
At the time of publication, Byrne had no positions in any of the stocks mentioned.