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Stone Fox Capital Advisors is a registered investment advisor founded in 2010. The firm offers portfolio management with a focus on opportunistic stocks providing secular growth trends at an affordable value. An emphasis is placed on fundamental analysis though charts are used for timing entry and exit points. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA. Invest with Stone Fox Capital's model Net Payout Yields portfolio on IB Asset Management as he makes real time trades. The site allows followers to duplicate the model portfolio in their own brokerage accounts. You can find the portfolio and more details here: Follow Mark on twitter: @stonefoxcapital

3 Canadian Cannabis Stocks Hurt By Vape Market Delays

The Canadian cannabis sector just can’t get regulators out of its way. The Cannabis 2.0 products were finally made available on December 17, yet a large portion of the provinces won’t allow key vape sales.

Last week, Alberta suspended the sales of cannabis vaping devices due to the concerns around their health effects despite signs that the vaping health issues are related to illegal vape products. While the regulatory agency has made it clear that this move is only a suspension, Canadian cannabis companies can’t afford more delays.

The Cannabis 2.0 products like vapes, edibles and topicals were supposed to carry higher margins and Eight Capital has vapes accounting for 20% of the market. A big profit driver of the market is now removed as Alberta isn’t the only province pushing back on vapes.

Quebec has banned vapes and most 2.0 products. In addition, Newfoundland and Labrador have suspended vapes and British Columbia slapped a 20% tax on vape product sales. Ontario also has major cannabis retail store issues.

The new plan released by the Alcohol and Gaming Commission of Ontario (AGCO) has guidelines for companies submitting store applications on March 2, with a goal of ultimately approving up to 20 retail locations per month starting in April. In total, Ontario is set to add 180 new stores next year and reach 250 stores by the end of 2020.

The Ontario market includes the key Toronto metro area and nearly 40% of the total Canadian population of 37 million. The Alberta and Quebec provinces add another 35% of the population blocked from the vape market. Only a fraction of the Canadian market has easy access to buy vape products and virtually no part of the population has cheap access to vapes.

We’ve delved into three companies that were set to benefit from vapes, but are now positioned to struggle until Ontario adds more retail stores and Alberta and Quebec remove the suspension on selling vape products:

Aphria (APHA)

Back in July, Aphria signed a deal with PAX Labs for their premium cannabis vaporization devices. At the time, the company estimated vapes and concentrates will represent 30% of the entire Canadian adult-use market by 2021. In addition, the company plans to strategically market edibles, beverages and topicals, with the hope that these products will eventually make up 10% of total sales.

Amongst the large Canadian LPs, Aphria is the least promotional on new product formats. The company forecasts strong sales from the category without really drumming up the actual products.

Aphria has a stated goal of reaching a C$1 billion annual revenue run rate at the end of 2020 with higher margins. The question one has to ask is whether the company can reach those targets without a full 30% of revenues coming from vapes and concentrates along with the much higher margins.

The FY20 forecast for revenues reaching nearly C$700 million would presumably require a substantial boost from vape sales. When the company reports FQ2 earnings in mid-January, the market will zero in on any update to financial targets after the initial weeks of Cannabis 2.0 sales and the general lack of availability of vape sales so crucial to hitting revenue targets.

While there are concerns, Wall Street analysts generally remain optimistic. The Moderate Buy analyst consensus breaks down into 6 Buy ratings and 1 Sell received in the last three months. Not to mention the $8.51 average price target puts the upside potential at 74%. (See Aphria stock analysis on TipRanks)

OrganiGram Holdings (OGI)

OrganiGram just announced the release of their first Cannabis 2.0 products. Several versions of their 510-thread vape cartridges have been shipped to Manitoba, Saskatchewan, Ontario, New Brunswick and Nova Scotia from the company’s Moncton production campus.

The only meaningful province on the list is Ontario where sales aren’t going to be significant with only 24 retail stores open in the province. OrganiGram is one of the first companies with vape products on the market, but the company doesn’t have a market to sell to.

OrganiGram is offering cartridges with three distinct offerings, Spark (sativa-dominant), Flicker (hybrid) and Glow (indica-dominant), inspired by dried flower and pre-roll products under the company’s Trailblazer-branded product lineup.

It plans to release other vaporized products over the next month including Edison + Feather ready-to-go distillate pens and Edison + PAX ERA distillate cartridges. Other products set for Q1 and Q2 release are infused chocolates and dissolvable powdered beverage products designed for faster onset of cannabinoids.

However, analysts only expect sales for FQ2 to reach $18.8 million. This isn’t even close to the peak levels from last year. Investors have to expect actual numbers to miss sales estimates due to the lack of any meaningful sales outlet for vapes.

Despite this, analysts aren’t giving up on OGI just yet. Looking at the consensus breakdown, 5 Buys and 2 Holds add up to a Moderate Buy. On top of this, the $6.14 average price target suggests shares could soar 161% in the twelve months ahead. (See OrganiGram price targets and analyst ratings on TipRanks)

Auxly Cannabis (CBWTF)  

Auxly Cannabis Group is one of the smaller Canadian cannabis companies offering a full suite of Cannabis 2.0 products. The vapes are based on technology from major investor Imperial Brands (IMBBY). The company has two brands releasing different vape products with various levels of THC and CBD formulations.

The Toronto based company has over 250 listings for Cannabis 2.0 products across nine provinces that cover vape, chocolate and chewable products. In total, Health Canada approved 83 derivative cannabis products for this rollout.

The recent Q3 report showed revenues of only C$1.6 million, mostly for research contracts. Additionally, analysts project 2020 revenues will reach $65 million, with a lot of the forecast revenue being based on vape sales.

The stock has a listed market valuation of $276 million so the biggest risk is the lack of access to vape customers, which hurts projected growth of a company still in startup mode. (See Auxly stock-price forecast and analyst ratings)

Check out these 5 ‘Strong Buy’ stocks that top Wall Street analysts recommend.

Disclosure: No position.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.


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