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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 Unknown Cannabis Stocks Set To Benefit From More Ontario Cannabis Stores

The Canadian cannabis sector just got an approval that solves a yearlong problem. Investors can now shift their focus to Canadian companies that can take advantage of the Ontario government’s plans to expand retail stores in the key province.

Last week, the Alcohol and Gaming Commission of Ontario (AGCO) revealed a new cannabis retail store plan for the province. The regulatory body revealed plans to eliminate the license limits of 2019 that have only yielded 24 open stores in Ontario.

However, the plan has a huge catch that is surely set to disappoint major cannabis cultivation companies like Canopy Growth (CGC), which outlined hopes for the province opening up 40 new retail stores per month in 2019, or the equivalent of 480 new retail cannabis stores for 2020. Instead, the AGCO established guidelines for Retail Operator Licenses, which can be submitted starting on January 6, and Retail Store Authorizations, starting March 2. The goal is to ultimately approve up to 20 retail locations per month starting in April.

In total, Ontario is set to add 180 new stores through this plan and reach 250 stores by the end of 2020, assuming the additional 50 retail lottery stores are opened. The plan won’t even allow Ontario to catch-up to the existing 350+ stores in Alberta for a few years. Ontario will take up to 3 years to reach analyst store targets of anywhere from 750 to over 1,000 stores based on the per capita comparison to the current store count in Alberta.

The Ontario market includes the key Toronto metro area and nearly 40% of the total Canadian population of 37 million. We’ve delved into these three relatively unknown companies set to benefit from the ability to open new retail stores in Ontario starting next April:

Alcanna (CLIQ)

Alcanna is a very interesting play in the Canadian cannabis sector. The company is already a leading liquor player in Alberta, generating quarterly revenues in excess of C$200 million. The company also has 16 Nova Cannabis stores open, with 15 in Alberta and one in Toronto. Alcanna has another 15 cannabis stores approaching license approval and opening by the end of the year.

In total, Alcanna is targeting 30 stores in Alberta, but the big news is its plans for Ontario. The Alberta company plans to open 10 Ontario stores by August 31, with another 10-15 opening up by the end of 2020.  The ultimate goal is to reach the 75 maximum store count, with a target of reaching the 30-store limit by September 2021.

For Q3, Nova Cannabis sales were C$12.9 million despite six stores opening during the quarter. While Alcanna isn’t a pure play in the cannabis sector, the company does have an interesting and fast growing retail model for a micro-cap stock.

The company is a rarity in the cannabis space, with it currently operating over 250 liquor retail locations in Canada and Alaska. Alcanna hopes that a history of running a retail operation provides it an edge in an industry where most of the companies are relatively new.

Turning to Wall Street now, the analysts’ take is more of a mixed bag. In the last three months, Alcanna has received 1 Buy rating and 2 Holds, making the consensus a Moderate Buy. In addition, the CA$7.00 average price target indicates 58% upside potential. (See Alcanna’s price targets and analyst ratings on TipRanks)

Fire & Flower (FFLWF)

Fire & Flower Holdings is the cannabis pure play version of Alcanna. The company already owns or has an interest in 38 cannabis retail store licenses across the provinces of Alberta, Saskatchewan, Manitoba, Ontario and the Yukon territory.

With the FQ2 quarter ending on August 3, Fire & Flower had revenues of C$11.1 million with only 22 branded cannabis retail locations open. Even before the Ontario regulatory body announcement, the company already had plans for 135 retail stores in Canada by FQ4 in 2021.

The company just announced FQ3 results for the period ending November 2, which show that Fire & Flower generated substantial growth. While the net loss remained at C$6 million, sales jumped to C$13.7 million in the quarter.

Fire & Flower now has 30 cannabis stores open with a listed market cap of only $84 million.

What do Wall Street analysts think? Given that 100% of the analysts that have published ratings in the last three months were bullish, the consensus is a unanimous Strong Buy. On top of this, the $2 average price target puts the potential twelve-month gain at 155%. (See Fire & Flower stock-price forecast and analyst ratings)

Inner Spirit Holdings (INSHF)

Inner Spirit Holdings is the last of the relatively unknown cannabis players covered here. The company generated Q3 revenues of C$4.0 million, with system-wide sales in excess of C$9.0 million.

The company operates the Spiritleaf retail cannabis brand and runs 37 stores in Canada. The company opened 25 retail stores during the last quarter, with the business model also including franchises. By Q1 next year, Spiritleaf is expected to have 10 corporate-owned locations with 40 franchised stores.

For Q3, Inner Spirit generated a gross margin of 47.6% and saw an operating loss of C$1.5 million. As with these other companies, the store ramps are so recent, making past quarterly results difficult to judge. In addition, these stated numbers don’t even factor in the substantial growth opportunity of the potential 75 new stores in Ontario over the next few years based on license approvals.

For investors not wanting to invest in a stock like Inner Sprit trading for only $0.09, Auxly Cannabis Group (CBWTF) owns ~15% of Inner Spirit and has a supply deal for up to 50% of Inner Spirit’s supply. Auxly Cannabis has a $283 million market cap and will benefit greatly from the expanded retail stores of the Spiritleaf brand via both the large investment in Inner Spirit and most importantly the supply to the new stores. Analysts forecast the company reaching 2020 sales in excess of $60 million before the additional supply expansion into Ontario.

In terms of analyst activity, it has been relatively quiet on Wall Street as only one analyst published a rating. Based on this one bullish call, the word on the Street is that Inner Spirit is a Moderate Buy. With the $0.40 price target, shares could soar 366% in the twelve months ahead.

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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