Canadian cannabis stocks have significantly underperformed the S&P 500 in 2021. That’s because these stocks are carrying significant risks, since a majority of them are struggling with massive losses with a high rate of cash consumption.
Canada legalized marijuana at the federal level in October 2018, but demand has remained low due to the slow rollout of retail stores in major provinces. The COVID-19 pandemic has exacerbated these problems, meaning that jar stocks have significantly underperformed broader markets since the start of 2019.
However, as the demand environment normalizes and companies improve their cost structures, it may be time to look again at this struggling industry. Here we compare two Canadian cannabis companies, Sundial Growers (SNDL) and the growth of flora (FLGC), to see what is the best investment right now.
The sundial has diluted shareholder wealth at an alarming rate
Sundial Growers went public in the second half of 2019 and the stock has since lost 90% of its market value. Despite an expanding addressable market, sales of sundials fell from $ 75.8 million in 2019 to $ 60.9 million in 2020. Analysts expect sales to drop to $ 56 million this year.
Alternatively, the company’s operating loss fell from $ 59.5 million in 2019 to $ 97.27 million last year. It also had a total debt of almost $ 200 million and a cash balance of only $ 45 million at the end of 2019. In order to offset its large cash consumption and high interest charges, Sundial raised funds. equity on several occasions after its IPO.
His number of shares outstanding is over $ 2 billion, up from $ 105 million at the end of the second quarter of 2020. Although the company is debt-free and has $ 986 million in cash, declining revenues remain a concern.
Sundial is actually looking to pivot its business by shrinking its product portfolio and gaining traction in the cannabis finance segment. He announced a series of investments in 2021 that include $ 22 million (debt and equity) with Indiva Limited, a maker of cannabis edibles. Sundial has created a joint venture with SAF Group, a private equity player, and by July 2021, it had contributed more than $ 400 million to the company.
The company’s second quarter interest and investment income was $ 9.4 million, which was higher than its net sales of $ 9.2 million.
Flora Growth is a recent IPO
A small-cap cannabis stock, Flora Growth trades at a market cap of $ 360 million. The company recently went public and has already gained almost 80% in market value. Analysts expect his sales to increase by $ 14 million in 2021 to $ 39.56 million in 2022. Flora is also expected to improve her net income from a loss per share of $ 0.08 to earnings of $ 0.03 per share during this period.
Flora Growth shares gained momentum thanks to a letter of intent the company signed with Avaria for a partnership. The joint venture will sell Avaria’s KLaya CBD cream known for its pain-relieving properties. The product is already popular in Canada and Flora will market it through the company’s distribution network in Latin America.
Flora Growth has also revealed its intention to grow and distribute cannabis products from Colombia, drastically reducing its costs. Cultivation costs medical cannabis in Colombia are less than $ 0.05 per gram compared to the average costs of $ 0.75 per gram in the United States
Colombia also benefits from the tropical climate which will help Flora Growth improve its overall yield capacity. In addition, Flora Growth has signed a distribution agreement with a major food distributor in Columbia, which will help it generate $ 10 million in sales each year while giving it access to 130,000 distribution points in 38 cities across the country.
The last takeaway
I believe FLGC is a better buy now. It can be seen that SNDL’s commercial backbone, declining income and poor financial situation make it a high risk bet compared to FLGC, which is running towards profitability. SNDL’s financing activity must increase its investments and interest income at an accelerated rate for investors to regain confidence in the company.
SNDL shares were unchanged on Friday after trading hours. Year-to-date, SNDL has gained 64.73%, compared to a 21.98% increase in the benchmark S&P 500 over the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes on business, public equity and personal finance. His work has been published on multiple digital platforms in the United States and Canada, including The Motley Fool, Finscreener, and Market Realist. Following…