In this series, we discuss the extreme price movements of the month. You can check out the best and worst performers of January 2019 here.
Best Performing Stocks
Village Farms: The stock already had an outstanding January but February was even better. As many other high-flyers took it easy last month, Village Farms continued to rise propelled by three catalysts. First of all, the stock was approved and began trading on the Nasdaq last month which has proven to be a well-timed event as many past uplistings didn't result in positive share price reaction such as Aurora and Aphria. However, CannTrust (CTST) also listed on the NYSE last month but the stock rose much less than Village Farms did most likely due to the other two catalysts for the latter. Village Farms also made significant progress at its Canadian JV, Pure Sunfarms, which was 75% licensed for sale and 100% completed for cultivation. The 1.1 million sq ft greenhouse converted facility is further supported by its first-ever supply agreement with the Ontario government. Outlook: After the recent performance of Village Farms, we think there are a few additional catalysts ahead. First of all, there could be more supply deals following its Ontario win as Canadian provinces look to source additional suppliers to combat shortages. Moreover, Village Farms could make further headways in the U.S. hemp industry as it just announced a joint venture for multi-state outdoor hemp cultivation and CBD extraction. The company is also looking at potentially converting its Texas greenhouse for indoor hemp although we don't think it would make sense given the cost advantage of outdoor growing. On the other hand, we think there are risks that the stock is overheated and could see a correction in the near-term. The U.S. hemp market is an attractive and logical extension of its existing business but the 200% return in 2019 so far appears excessive, in our view.
Medipharm: This company is another top performer with its 70% gain last month. We plan to begin covering the stock shortly but the story for Medipharm has been one with consistent execution and niche focus. The company offers contract extraction services to licensed producers that do not have in-house extraction capabilities. It has signed on multiple LPs to provide extraction services in Canada and recently in Australia. Meanwhile, it also achieved impressive momentum in its private label business where LPs purchase oil concentrates from Medipharm on a private-label basis. Outlook: We think the company has achieved a first-mover advantage and is well-positioned to become the leader in the specialized extraction business. Its main competitors are Valens GroWorks (OTCQB:MYMSF) and Neptune (NEPT) but the three players are essentially dominating this fast-growing industry. We believe MediPharm is just beginning to capture a large potential market globally as cannabis companies switch to the outsourcing model for their extraction needs, to the benefit of Medipharm.
(February 2019 Best Performers)
Worst Performing Stocks
Namaste: The story at Namaste is one filled with drama and questionable management decisions. However, as we discussed in "Board Removed CEO In A Much-Needed Overhaul", the Board took decisive actions to remove Sean Dollinger from his CEO and Board seats and is launching a strategic review of the company's future including a sale of the business. Outlook: The underperformance should not come as a surprise to anyone as the management turmoil is surely affecting the company's execution and near-term outlook. It also seems unclear to us who would be potential buyers for Namaste and whether a sale would be ultimately value-maximizing for shareholders. Thus, we remain on the sidelines on this stock.
Wayland: The stock has been plagued by its slow execution in Canada and upcoming cash shortages. The company reported Q3 revenue of $225,000 which is an 80% drop from Q2 revenue of $1.3 million. In a recent corporate update, the company announced Q4 revenue of C$1.3 million which is a big disappointment as the company failed to benefit from the legalization in October. The company also failed to convert its previously announced LOI with CSE-listed International Cannabis Corp into definitive agreements. It is unclear whether there is still a deal to sell 49.9% of its international assets given the exclusivity period has passed on February 20. Outlook: We see very few near-term catalysts for Wayland as its Canadian operations continued to tread water while a partial sale of international assets is currently in limbo. We think there are better opportunities in the sector other than Wayland.
(February 2019 Worst Performers)
The cannabis sector experienced another strong month after a blowout January to begin in 2019. The biggest gainers this month were two stocks that outperformed due to their unique positioning in the cannabis market. Both top-performers are based in Canada but Village Farms benefited from its recent U.S. listing and entry into the U.S. hemp market while Medipharm continued its extract specialist strategy in Canada and abroad. Among the top losers, most of them are small-caps as we have repeatedly said in the past. Small-caps have higher volatility and many of them are battling waning investor confidence as sales disappointed and governance takes center stage in certain cases. Heading into March 2019, we think the momentum should continue if the global equities market remains supportive and investor appetite for risky assets stay open. Small-caps will continue to exhibit higher volatilities while large-caps will reflect the general sentiment in the sector barring significant events such as Aphria's hostile bid situation. We think the market sentiment remains supportive for cannabis stocks after a fantastic start to the year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.