NEW YORK, Dec. 10, 2019 /PRNewswire/ -- There's no hiding the fact that the legal recreational pot industry has underperformed. Challenges primarily at the retail level?such as a lack of dispensaries, unnecessarily burdensome regulations, and a rapid erosion of investor trust?have led the pot space to fall short of reaching its full potential. Investors can't be blamed for feeling hesitant to put money on pot stocks, but the hardship that the industry currently faces does not indicate that the market should be abandoned. In fact, the potential for adult-use recreational pot is still high, the pay-off has simply been delayed. This last year lacked most of the catalysts that investors were relying on to kick the industry into gear, but many of them will arrive in 2020. Until then, the market is undergoing a period of correction that will "weed out" the truly underperforming companies from the ones that can deliver. By studying the moves of pot companies that have spent 2019 investing in growth and future business strategies, we can find the pot stocks that are positioned to dominate the space in the coming years. Specifically, companies like Meta Growth Corp. (TSXV:META), OrganiGram Holdings (TSX:OGI) (NASDAQ:OGI), Fire & Flower Holdings Corp (TSX:FAF) (OTCPK:FFLWF), Supreme Cannabis Company (TSX:FIRE) (OTCQX:SPRWF) and Aphria Inc (TSX:APHA) (NYSE:APHA) are positioned to grow rapidly in the near term and flourish in the long term.
The Industry is Turning Around
Factors expected to drive growth over the next few years include the arrival of edibles, beverages, and vaping products, as well as greater education and awareness of the benefits of CBD products will also expand the consumer base. Also, as the legalization movement gains traction in the US?thanks to the momentum of things like the MORE Act?investors will return to pot stocks with even more vigor than before.
Bethany Gomez, managing director of Brightfield Group, says that an "adjustment" will occur which will get the recreational pot industry back on track. This adjustment will involve some companies losing value and potentially going under. But those that survive will ultimately thrive, and, with less competition, will enjoy a greater share of the market.
"The good thing is, Canada has one of the highest [pot] usage rates in the world?so it's going to be a longer play," said Gomez.
According to a study conducted by FTI Consulting Inc.?who spoke with 660 retail investors with at least $250,000 in investable assets?79% of Canadians and 74% of Americans still find the pot retail industry appealing.
The only question that remains is, which companies will stick around long enough to benefit from this longer term play? To answer that, it's necessary to look at companies that have spent the first year of legalization focusing on growth and readying themselves for the coming boom.
Meta Growth is Going Above and Beyond
Until recently, Meta Growth Corp. (TSXV:META) was known as National Access Cannabis. According to the company, the name change?which aligns its corporate and retail brands, as well as its stock ticker?reflects its intention to become "the preeminent pot retailer in Canada."
As part of its rebranding, Meta Growth is selling its portfolio of medical pot clinics, expecting to raise $4 million which will be used to fund the buildout of recreational pot retail stores.
"As the industry has evolved, our focus has shifted from medicinal to recreational [pot], and today, retail is our portfolio and our future," said CEO Mark Goliger. "Brand recognition and consistency are key to our success and META is ready to continue to maintain our leadership position in the Canadian retail market."
The potential for recreational pot is clear. Of the $5.2 billion USD that will be spent on Canadian pot by 2024, 92% of it?or roughly $4.8 billion?will go towards the recreational sector. And, as Goliger said, Meta Growth is already a leader there.
According to a press release from mid-October, in the first year following federal legalization, Meta Growth Corp. (TSXV:META) has made over $60 million in retail sales at a cumulative gross margin of 32%. This allows the company to claim the title of Canada's "largest publicly traded recreational [pot] retailer by revenue," and makes it one of the fastest growing and largest revenue generators in the entire Canadian industry.
This positions the company as perhaps investors' best chance to capitalize on the long-awaited pot boom. Not only has META proven it can earn serious revenue, it can also leverage all the data gleaned from millions of customer interactions in order to better access consumers and develop long-term customer loyalty.
In coordination with its growing revenue and customer base, the company is also expanding its retail footprint across Canada. It currently has 35 licensed stores in the country, and plans to have 95 stores operating by the end of calendar 2020.
Given the progress of Meta Growth Corp.'s (META.V) sales, community, and retail reach, there's little reason to doubt that it will make good on its intention to become Canada's leading pot retailer in time to capitalize on the industry's value maturation.
Other Companies Investors Should Consider
According to its Q4 2019 fiscal results released at the end of November, OrganiGram Holdings (TSX:OGI) (NASDAQ:OGI), the company's net revenue for 2019 grew 547% year-over-year. It also became one of the first pot companies to post a positive adjusted EBITDA, putting it in a highly enviable position in the industry.
Much like Meta Growth Corp. (META.V), Fire & Flower Holdings Corp (TSX:FAF) (OTCPK:FFLWF) has focused on growing its retail footprint in the Canadian prairies. On November 26 it announced the opening of its 34th, 35th, and 36th dispensaries. By the end of its fiscal year in February, it plans to have 45 stores in total.
On the production side of the supply chain, the Supreme Cannabis Company (TSX:FIRE) (OTCQX:SPRWF) recently expanded its manufacturing capacity with a 107,000 square foot central processing facility in Ontario. In addition, having received the proper license amendment last month, its Blissco facility will begin filling and packaging vaporizer pods for Pax Labs, makers of the best-selling pen-and-pod system in the US.
Finally, Aphria Inc (TSX:APHA) (NYSE:APHA) is perhaps the best-funded company in the recreational pot space. Likewise, it's predicting the highest revenues for the coming year. In its Q1 2020 earnings, Aphria forecast net revenue between $650 million and $700 million, with adjusted EBITDA of approximately $88 million to $95 million.
What Investors Can Expect from Pot in 2020
When analysts at BDS Analytics cut value estimates on Canada's recreational pot market from $5.9 billion USD by 2022 to $5.2 billion USD by 2024, many saw it as a repudiation of the "green rush." In reality, it only pushed the true green rush just a little further down the road.
The estimate was cut due to the poor roll-out of legalization, not because the market itself lacks the potential that analysts first identified. Over the next five years, the market will be growing at a compound annual growth rate of 44%.
For Meta Growth Corp. (META.V) this presents a clear window for capitalization. The company's capital raised from selling its medical clinics?as well as its revenue growth in excess of 3,000% year-over-year?will serve as a springboard for its expanded retail footprint. With 95 stores expected to be open across Canada by the end of 2020, it will be incredibly well positioned to capture a sizable portion of the multi-billion dollar market.
Among META's competitors, OrganiGram Holdings is making some of the most revenue-forward moves in the industry, posting positive adjusted EBITDA while many recreational pot companies are still struggling to break even. Fire & Flower Holdings Corp has also been growing its retail footprint, and now has roughly the same amount of dispensaries as Meta. It's ambitions for future growth, however, are more conservative.
For production, the Supreme Cannabis Company) is ensuring it's well-positioned to supply pot products through its newfound facilities. Meanwhile, Aphria Inc) is projecting unprecedented revenue growth in the coming year, and is financed to ensure it makes good on its forecast.
These five companies are making the exact moves needed to not only survive in the recreational pot industry, but to control it in just a few years' time. Investors looking to make a pot play should consider Meta Growth Corp. (TSXV:META) and its contemporaries first and foremost as the market finally delivers on the lucrative promises of the "green rush."
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