However, forward-looking cannabis investors are intent on positioning themselves for the inevitable boomerang in this space. Revenues are rising. Profitable companies are emerging. (Stock) price is on a clear collision course with value.
For such investors, one particularly interesting sub-sector in the cannabis industry is Canadian cannabis retail.
Despite the poor execution of Canada’s largest provinces (Ontario and Quebec) in licensing retail cannabis stores, Canada remains a more advantageous jurisdiction for cannabis investing. Recent regulatory chaos in the U.S. (at both the state and federal level) has only emphasized this advantage.
The Seed Investor has previously looked at Canada’s leading cannabis retailers. One of these companies is Fire & Flower Holdings (CAN:FAF / US:FFLWF).
Fire & Flower has executed well. It has efficiently become one of Canada’s largest cannabis retailers. But that hasn’t spared the Company (and its shareholders) from the relentless sell-off in cannabis stocks in 2019.
[chart courtesy of Stockcharts.com]
The flip-side of this equation is that Fire & Flower is an especially attractive value proposition for investors.
Its most recent quarterly report showed both solid quarter-over-quarter revenue growth in fiscal Q2 as well as a significant expansion in retail outlets. The Company has continued its retail expansion through both cost-effective acquisitions and organic growth.
Directly ahead for Fire & Flower (and other Canada cannabis retailers) is Cannabis 2.0. Phase 2 of cannabis legalization brings not only a dramatic increase in product selection/variety. It also brings a large expansion in the consumer base (an estimated 50% increase in consumers).
Current market conditions also make Fire & Flower especially attractive. Its July 2019 strategic investment from grocery/convenience store giant, Alimentation Couche-Tard (CAN:ATD.A / US:ANCTF) provides a level of financial support that many cannabis companies would envy at present.
Couche-Tard made an immediate investment of CAD$25 million in Fire & Flower. But it has pledged up to CAD $380 million in “growth capital”. That would allow it to gain a controlling interest in Fire & Flower.
It was a shrewd move by Couche-Tard. However, it also provides Fire & Flower (and its shareholders) with access to additional capital – and a degree of financial security that will be reassuring to potential investors.
Fire & Flower now has a total Canadian retail network of 38 cannabis stores. This is spread across the provinces of Alberta, British Columbia, Saskatchewan, Manitoba and Ontario, as well as the Yukon Territory.
The Company maintains an aggressive timetable for expanding this cannabis retail network.
Couche-Tard’s dominant position makes a long-term acquisition of Fire & Flower likely. This may limit long-term upside potential for shareholders. However, given the punishing year experienced by cannabis investors, many may be willing (today) to sacrifice long-term upside for near-term strength.
As cannabis investors gear up for 2020 (and Cannabis 2.0), they may consider shares in Fire & Flower when they are pondering this year’s “Boxing Day sales”.