Add This Undervalued Cannabis Stock To Your Watchlist Now

When people talk about having a green thumb, it’s easy to imagine the fruits of their labor in the garden, perhaps in the form of a greenish heirloom tomato supported by a sagging vine. But when it comes to agribusiness, the success of a crop may not be a guarantee of obtaining different culture to grow and get to market effectively.

This is exactly the dilemma that faces Village Farms International (NASDAQ: VFF), a vegetable company that started selling cannabis in an attempt to capitalize on its expertise in indoor growing. While it hasn’t been proven to grow marijuana as profitably as tomatoes, shareholders are already happy with the rapid growth in revenues and the prospect of entering the U.S. cannabis market. Due to its earnings volatility, this stock is not for everyone, but I’ll get to that shortly.

Image source: Getty Images.

Why this action is worth watching

Village Farms deserves a place on your watch list for several reasons.

The first is that the market may undervalue the stock by placing too much weight on the short term. While in the last quarter, Village Farms increased its total revenue by 63% year-over-year, but it also saw a 63% decline in adjusted profit before interest, taxes, depreciation and amortization (adjusted EBITDA). The stock price is still depressed from its early year highs due to these low profits, but the company’s capabilities have only increased over time, and there is a little more to tell. Because the company derives the majority of its income from the sale of produce, any fluctuation in market prices for vegetables can cause big waves.

Historically low tomato prices are more to blame for the recent slump in profits than a decline in operational efficiency. So, as tomato prices rebound, Village Farms’ inventory is also expected to increase. But, unless you’re a tomato market oracle, it’s hard to say exactly when that might be.

The company also has no shortage of other cash flow opportunities aside from selling tomatoes and cucumbers. His cannabis business, Pure Sunfarms, grossed $ 17.4 million in the first quarter of 2021. Given that that revenue is already large compared to his $ 34.9 million in product revenue, it’s quite possible that the company’s dependence on tomato prices will be significantly reduced. before. This is good news for investors as it will make the bottom line more resilient. But, they will also have to worry about the impact on profits of the price of cannabis as well as the price of tomatoes.

Regardless of the price of the plants, Village Farms also has a plethora of outstanding warrants, which were created during its direct stock offering registered in September 2020. Most recently, it earned $ 17.7 million. dollars in cash on some of the warrants exercised. There are still over 1.65 million of these warrants outstanding, meaning there is potentially a lot more revenue to be had. It is not clear whether the market correctly assessed the value of these warrants, given that they have been shown to be capable of producing more than the company’s cannabis segment in a single quarter.

Finally, the price-to-book (PB) ratio suggests that it is undervalued. The agricultural sector has an average PB of 3.21, which is a bit higher than the village farm ratio of 2.28 in the most recent quarter. This means that investors get a little more book value for each share with the stock than they could with an equivalent investment elsewhere in the industry.

Why not buy it today?

If you’re willing to make a principled bet that Village Farms’ cannabis business will take off in the next few quarters, there’s no reason to avoid investing in it today. If his first quarter of cannabis revenue is any indication, there is plenty of room for this stock to function with the help of bulk cannabis sales. But, if you’re not very risk tolerant, it’s probably a better idea to add it to your watchlist.

It is likely that at least some of the pricing issues in the tomato market are the result of residual strangeness in the supply chain attributable to the coronavirus pandemic. While people in the United States may feel like the pandemic is over, it is still a significant issue affecting the majority of the world. In other words, I don’t think it’s wise to predict that the tomato market is about to get back to normal because it could take years. And for that stock to really skyrocket, tomato prices matter a lot.

So, keep an eye out for Village Farms. When the stock starts showing up after a profit report, this will be a good time to consider a buy.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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