Cannabis investors have been on a rollercoaster ride this year, with COVID-19 fundamentally changing the sector. Staring into the second half of 2020, what kind of metrics should market participants look for?
Nawan Butt, portfolio manager with Purpose Investments, told the Investing News Network (INN) that among other things he’s been drilling down on key balance sheet numbers. He noted that in the Canadian marijuana sector, attention is shifting to the sales performance of public producers.
He’s also been examining the value of the cannabis brands put forth by these companies. Read on for a closer look at what Butt wants to see among marijuana companies right now.
Balance sheets and achieving profitability
Sales have been in focus as the novel coronavirus has spread across Canada. While COVID-19 has ramped up the struggles seen by public cannabis names, it has also brought much-needed solid movement in retail sales of recreational product across the country.
Recreational cannabis sales in Canada have been varied during the outbreak, but on Wednesday (July 24), Statistics Canada confirmed that sales for the month of May upended those of April by over 4 percent. The total for May was just under C$186 million.
Speaking about performance, Butt said that the pressure on cannabis companies has heightened thanks to the economic impact and investment complications seen from the reaction to COVID-19. He said he’s been dedicating a lot of attention to the balance sheets of public cannabis companies in order to really see the strength of their presence and if they are ready to survive further tension.
“For these producers, the current year or the second half of the year really depends on getting to profitability, and getting to profitability is going to be a large battle in the deep-value space,” Butt said.
The Q2 2020 period for cannabis highlighted the shifts in thinking surrounding the cannabis opportunity.
At a recent online investor forum, Alan Brochstein, marijuana analyst and industry commentator with 420 Investor and New Cannabis Ventures, said cannabis investment stories are beginning to be rewarded for simplicity. That’s compared to earlier, when more complex operations were valued.
Butt told INN he evaluates the various licensed producers (LPs) in Canada by grouping them by distinctive metrics and comparing them.
“For instance, LPs that have balance sheet strengths, we put them up against each other and we take a look at their multiples … LPs that have distressed balance sheets, we take a look at those together. LPs with smaller footprints, more specialized products, we take a look at those together,” he said.
Cannabis investments have grown to the point where a blanket statement of performance no longer works; instead, investors have to really evaluate the different sizes and opportunities attached to these companies and compare them to the respective groupings they belong in, according to Butt.
Brands struggling to catch on with consumers
Butt said brand competition will be key particularly when it comes to value options and the ability to sell large volumes of cannabis product from producers.
“That deep value is essentially going to subsidize any operations that go on for the higher-margin products that they’re taking a look at,” the expert said.
However, brands in Canada have not really made an impact in the minds of consumers. A recent report from the Brightfield Group shows that no current active brand in the country has a higher recognition factor than 41 percent, with most averaging between 1 and 15 percent only — a tough blow for the marketing and promotion done by the cannabis industry so far.
The data from the researchers shows that when it comes to actual purchase decisions, consumers will pick products based on price.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.