On today's TSX Breakouts report, there are 36 stocks on the positive breakouts list (stocks with positive price momentum), and 19 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the positive breakouts list. The company is a market leader in an industry that is expected to undergo explosive growth. The security discussed today is marijuana producer, Canopy Growth Corp. (WEED-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The Company
Ontario-based Canopy Growth is a market leader in the Canadian medical cannabis industry that is well-positioned to experience exponential growth in upcoming years. Management is focused on continued growth and new expansion opportunities in the medical marijuana market, the recreational marijuana market, and international markets. The company produces dried, oil, and capsule form cannabis through its three core brands: Tweed, Bedrocan, and Mettrum. The company's cannabis production is derived from both indoor and greenhouse growing operations.
Canopy Growth services the Canadian market as well as international markets such as Germany. In a news release issued in June, the company indicated that its Germany subsidiary distributed cannabis products to over 480 pharmacies in Germany, up from 200 pharmacies just two months prior. Management views Europe, Australia, and South America as attractive regions to expand in. For now, the company is shying away from the U.S. market. According to the news report, management remains "committed to only conducting business in jurisdictions where it is federally legal to do so. Canopy Growth believes that operating and investing in markets where such activity is federally illegal puts the company at risk of prosecution, puts at risk its ability to operate freely, and potentially could jeopardize its listing on major exchanges now and in the future."
There has been a steady flow of positive news announcements from the company over the past month.
Last week, the company reported it had signed a two-year supply agreement with the Province of New Brunswick valued at approximately $40-million in the first year. Under the Memorandum of Understanding (MOU), Canopy Growth will supply cannabis products to the province's retail stores. As the targeted July, 2018, federal legalization of recreational-use marijuana approaches, investors could see additional agreements announced.
To support the expected strong demand growth, earlier this month, the company announced plans to triple its production space at its Tweed Farms facility in Niagara-on-the-Lake, Ont., increasing its greenhouse space over 1-million square feet by April 2018.
Before the market opened on Aug. 14, management reported its first quarter fiscal 2018 financial results. The company's fiscal year end is March 31. Revenue was $15.9-million, up 127 per cent year-over-year. The company harvested 5,575 kilograms of marijuana, up 196 per cent year-over-year. As at June 30, the company had over $115-million in cash and cash equivalents. In June, management expanded its diverse product offerings, successfully launching cannabis oil soft gel capsules in Canada. On the earnings conference call, management provided an operational update, indicating that they received their license for their new marijuana production plant in Saskatchewan and production has begun. This facility is expected to be fully operational in 2018. Furthermore, the company is awaiting the final inspection from Health Canada for a license at its St. Lucien, Qué. plant. The share price increased 1.6 per cent that day.
Dividend Policy
The company is focused on growth and currently does not pay its shareholders a dividend.
Analysts' Recommendations
There are eight firms that have provided recent research coverage on this company, of which seven analysts have buy recommendations (more specifically, two analysts have 'speculative buy' recommendations), and one analyst (from Canaccord Genuity) has a hold recommendation.
The eight firms with recent research coverage are as follows in alphabetical order: Beacon Securities, Canaccord Genuity, Cormark Securities, Cowen, Echelon Wealth Partners, Eight Capital, GMP, and PI Financial.
Financial Forecasts
Revenue is anticipated to accelerate in 2019 and thereafter. The consensus revenue estimate is $94-million in fiscal 2018, $287-million in fiscal 2019, $443-million in fiscal 2020, and $629-million in fiscal 2021.
The Street is forecasting an earnings loss of 15 cents per share in fiscal 2018, with the company turning earnings positive in fiscal 2019. The consensus earnings per share estimate is 10 cents in fiscal 2019. By fiscal 2020 and fiscal 2021, the consensus earnings per share estimates are forecast to reach 38 cents and 88 cents, respectively.
Top line estimates have moderated in recent months. For instance, three months ago, the consensus revenue estimates were $120-million for fiscal 2018 and $301-million for fiscal 2019.
Valuation
The stock can be valued using various methodologies such as a discounted cash flow analysis or using an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) approach. According to Bloomberg, the stock is trading at an EV/EBITDA multiple of over 15 times the consensus fiscal 2020 estimate.
The one-year consensus target price is $11.53, suggesting there is 12 per cent upside in the share price over the next 12 months. Target prices have a wide range, from a low of $9.50 (implying the stock is overvalued) to a high of $14 (suggesting there is upside potential of 36 per cent). Individual target prices are as follows in numerical order: $9.50, two at $10.50, $11, $11.50, $12, $13.25, and $14.
Revised Recommendations
So far this month, two analysts have made minor revisions to their target prices.
Jason Zandberg, the analyst from PI Financial, tweaked his target price, lifting it to $13.25 from $13. Vivien Azer, from Cowan, increased her target price to $10.50 from $10.
Insider Transactions
There has been very little insider trading activity in recent months. The most recent transaction in the public market reported by a management executive or board member occurred in March.
On March 31, board member John Bell sold 19,650 shares at an average price north of $10 per share, leaving a portfolio balance of 36,350 shares.
On March 29, chairman and chief executive officer Bruce Linton sold 350,000 shares at an average price per share over $10 with a sizeable remaining portfolio balance of 2,766,225 shares.
Chart Watch
Year-to-date, the share price is up 12 per cent. However, over the past three months, the stock price has rallied sharply. The share price is up over 14 per cent month-to-date, and is up over 50 per cent from its 2017 low realized on June 6 when the share price closed at $6.82.
In terms of key resistance and support levels, the stock price has initial overhead resistance around $11, and after that, around $13. Should the share price retreat, there is downside support around the $9 level, near its 200-day moving average (at $9.52) and its 50-day moving average (at $8.81).
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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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