Don’t Buy This Dip

You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.

Friends,

About five months ago, we wrote about Canopy Growth, saying it was a potential zero. The good news is that zero is as low as it can go! The company reported its fiscal Q2 this week, and it published its 10-Q and hosted a call.

The top-line continues to sink. In the New Cannabis Ventures revenue rankings for companies that report in the Canadian currency, Canopy Growth is the third highest. Revenue of C$69.6 million was down 9% sequentially and 21% from a year ago. The good news is that the adjusted operating income improved a lot, to -C$7.0 million. That’s not such great news, though!

While revenue isn’t growing, the number of shares sure is. The number of shares outstanding has ballooned to 829 million, and the fully-diluted in-the-money share-count is now 868 million. This includes some options that have been issued this year.

Taking the higher share-count into the analysis, the market capitalization is now about C$625 million, which is 1.2X the adjusted tangible book value. This sounds good, but it’s not especially good. We have shared some alternative LPs in the past, and they trade at much lower valuations by this metric. Plus, they aren’t burdened by so much debt.

While Canopy Growth has a large outside investor in Constellation Brands, it’s not clear if Constellation will bail the company out or buy it. British American Tobacco invested a lot in Organigram this week at a big premium, but the stock didn’t even ultimately move that much.

Since we wrote that last piece on Canopy Growth, it is up more than 35%, but it has dropped a lot over the last year and from its recent peak:

While Canopy Growth has rallied since mid-July, the alternative stocks we have shared have rallied less or even declined. We continue to think that Canopy Growth may not make it. The company doesn’t have a good business at all, and its debt is massive at C$681 million. The company has C$270.4 million, so there is no short-term issue, but it is burning cash. Even this quarter, which was much better than prior quarters, its continuing operations consumed C$24 million.

If you think that Constellation will buy the company eventually at a big premium, it may be worth it to wait. Otherwise, there are several alternative Canadian LPs that trade below tangible book value and have no debt. While we sound like we might be late to bring attention to this company’s challenges, we started warning readers about Canopy Growth in late February when the stock closed at $2.33. It is now $0.52. This is not a dip to buy in our view.

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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

Exclusives

Financial Reports

A Strong Quarter for GTI

Ascend Wellness Q3 Revenue Lifts 15% Sequentially

Big Investor in Organigram Invests More

Curaleaf Misses Revenue Analyst Estimate for Q3

Trulieve Q3 Revenue Slips Less than Expected

Verano Q3 Revenue Grows 3% Sequentially to $240 Million

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Sincerely,

Alan & Joel

Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email