The cannabis carnival continues.
As we've pointed out these past few weeks, Jefferies analyst Owen Bennett seems to have developed an interest in cannabis ... stocks, initiating coverage on at least 10 of them since he first began assigning ratings on Feb. 25. Yesterday, Bennett delved a little deeper into the industry to update investors on recent happenings in this happiest of industries.
Bennett's update concerns Mississauga, Canada-based cannabinoid oil R&D shop The Green Organic Dutchman (TGOD), which the analyst included in its initial survey of the industry last month. TGOD has just signed a multi-year "extraction service agreement" with fellow Canadian cannabis researcher Valens GroWorks.
Under the terms of their deal, TGOD will provide "cannabis and hemp biomass" and Valens will "process, extract and purify" same, providing TGOD with "concentrated cannabinoid resins and distillates to produce oils, sprays and capsules as well as oils for vaporization and future edible, beverage and topical products."
This contract will initially run for two years, and if and when Valens succeeds in obtaining certification of its processing methodologies as "organic," it agrees to produce organic cannabinoid resins (etc.) exclusively TGOD for a term of one year. This could give TGOD a leg up over any competitors unable to get access to a supply of such organic-labeled marijuana-derived consumables.
And yet, Bennett actually views this news as a negative.
As Bennett explains, TGOD has been targeting production of perhaps 60,000 kg of cannabis derivatives by year-end. Despite this objective, the analyst was already concerned that TGOD might be unable to produce sufficient CBD volumes to take full advantage of cannabis "derivatives" legalization, if and when it occurs. In the analyst's view, the deal suggests that production remains a problem for TGOD -- enough so that it's had to seek outside help from Valens -- and "this could be a possible negative" for TGOD.
Bennett rates TGOD a Buy with a C$6.10 price target, which implies nearly 40% upside from current levels. (To watch Bennett's track record, click here)
Meanwhile in Germany ...
In other news, Bennett notes that Aurora Cannabis (ACB) has begun selling cannabis oil into the German medical market, where together it, and Tilray, are now believed to be the only producers supplying both marijuana flower and derivatives. The analyst views Germany as a "key" market to making cannabis an international growth industry, citing both "strong patient growth" and high margins on marijuana sales into the Teutonic state as making Germany an attractive market.
Meanwhile, Bennett points out, Canadian companies' international sales of cannabis in 2018, outside of Canada, were "broadly similar to the weekly sales seen in Colorado."
Let me repeat that: What (legal) marijuana sellers sold in one week, in one U.S. state last year, equaled what Canadian marijuana producers sold (legally) in all of the rest of the world, combined, in one year. In an exercise of droll understatement that would do a British banker proud, Bennett calls this sales performance "underwhelming."
Now, the flip side of this is that winning a large market such as Germany could yield large growth off of a very small sales base. Seen in this light, even the fact that Aurora is just beginning to sell into this market has to be seen as a positive for the stock.
Overall, Bennett rates ACB stock a Buy with C$12.00 price target, suggesting the stock has about 17% upside from where it's currently trading.
For more insights, check out our cannabis stocks category.