On today’s TSX Breakouts report, there are 47 stocks on the positive breakouts list (stocks with positive price momentum), and 14 securities are on the negative breakouts list (stocks with negative price momentum).
On Friday, the S&P/TSX composite index fell 1 per cent with 65 per cent of the constituents in the S&P/TSX Index closing lower. Bucking the market weakness were gold stocks, high-yielding securities as well as several cannabis stocks.
Discussed today is a stock that appears on the positive breakouts list – cannabis operator Curaleaf Holdings Inc. (CURA-CN).
Last week, the share price spiked higher after management announced a distribution agreement with U.S. drugstore operator CVS Health Corporation (CVS-N) with management’s “hope to cement” additional national deals later in the year.
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Headquartered in Vancouver, Curaleaf is a cannabis company with dispensaries in 12 U.S. states, including Arizona, California, Connecticut, Florida, Maine, Maryland, Massachusetts, Nevada, New Jersey, New York and Oregon. The company anticipates expanding into two additional states later this year - Ohio and Pennsylvania.
Management targets having over 70 dispensaries by the end of 2019, up from 43 currently. The company has a line of hemp-based CBD (cannabidiol) products under the banner Curaleaf Hemp serving roughly 50,000 patients a month.
The company is vertically integrated in most of these 12 U.S. states.
On the earnings call, executive chairman Boris Jordan remarked, “Vertical integration is core to our strategy because it drives higher margins in the cannabis industry, specifically because we cultivate, manufacture and retail our products, we control the price, the quality, which translates into strong margins.”
The company has 12 cultivation plants with current production capacity of approximately 63,000 pounds of dry flower, which is targeted to expand to over 290,000 pounds of dry flower by 2020.
On March 20, the company released its fourth-quarter financial results. Revenue came in at U.S.$32-million, up 49 per cent from the prior quarter. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was a loss of U.S. $3.4-million with a net loss of U.S. 4 cents per share. The company had U.S. $266-million of cash on its balance sheet as at Dec. 31. On the earnings call, Boris Jordan stated that they, “Have the cash on hand to execute our organic growth plan and to continue to expand with no near-term need to raise additional funds.”
What caused the stock price to jump over 30 per cent the following day was news of a distribution agreement with a major U.S. drugstore retailer. On the earnings call, chief executive officer Joseph Lusardi announced that, “Starting this week, our Curaleaf Hemp products will be available at over 800 CVS Health stores across 10 States and soon on the CVS.com website. We are continuing to work on additional retail partnerships and we’ll be excited to share them with you as they develop”. He added that CVS Health is, “Just one of the many national retail partnerships that we hope to cement in 2019. We’re having a dialogue with many of the leading retailers across the country.”
Dividend policy
The company is focused on growth and currently does not pay its shareholders a dividend.
Analysts’ recommendations
This mid-cap stock with a market capitalization of over $4.3-billion is covered by five analysts, of which three analysts have ‘buy’ recommendations and two analysts have ‘speculative buy’ recommendations.
The firms providing research coverage on Curaleaf are as follows in alphabetical order: Canaccord Genuity, Cormark Securities, Eight Capital, GMP Securities, and Seaport Global Securities.
Revised recommendations
Earlier this month, Robert Fagan, the analyst at GMP Securities, lifted his target price to $21 from $20. Matt Bottomley, the analyst at Canaccord Genuity, lifted his target price by 50 cents to $14.
Financial forecasts
The Street is forecasting strong earnings growth for the company and for the company to become profitable this year. The consensus revenue estimates are US$302-million in 2019, US$549-million in 2020, and US$584-million in 2021. EBITDA is anticipated to come in at US$94.5-million in 2019, US$214-million in 2020, and $222-million in 2021. The consensus earnings per share estimates are 7 US cents in 2019, up from an earning loss of 16 US cents per share in 2018, 21 US cents in 2020, and 29 US cents in 2021.
Management has guided to delivering revenue of US$400-million and free cash flow of US$100-million in 2019.
Earnings expectations have been revised higher. For instance, three months ago, the consensus revenue estimates were US$240-million for 2019 and US$450-million for 2020. EBITDA estimates were US$90-million for 2019 and US$190-million for 2020.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 7.7 times the 2020 consensus estimate. In comparison, shares of industry peer Charlotte’s Web Holdings Inc. (CWEB-CN) are trading at an enterprise value-to-EBITDA multiple of 8.9 times the 2020 consensus estimate.
The average 12-month target price is $16.07, implying the share price has 25 per cent upside potential over the next 12 months. All but one analyst (the analyst at Seaport Global Securities) have their target prices expressed in Canadian dollars. Individual target prices vary widely and are as follows in numerical order: U.S. $10 (the low on the Street is from Brett Hundley, the analyst at Seaport Global Securities), $14, $15, $17, and $21 (the high on the Street is from Robert Fagan, the analyst at GMP Securities).
Insider transaction activity
Year-to-date, there has not been any trading activity reported by insiders.
As indicated in the fourth-quarter earnings release, “On March 20, 2019, the Company founders and other key shareholders have entered into voluntary lock-up agreements with the Company in respect of 249,037,550 subordinate voting shares and 122,170,705 multiple voting shares. This represents 81 per cent of the total shares outstanding. The voluntary lock-up agreements stipulate that these shareholders will not sell, directly or indirectly, any Curaleaf securities without Company approval prior to October 20, 2019.”
Chart watch
Technical analysis is limited given the stock’s brief trading history. The stock was just listed on the Canadian Securities Exchange in October 2018.
Year-to-date, the share price has doubled, rising 99 per cent. On Friday, the stock price closed at a record high on very high volume with over 10-million share traded, well above its three-month historical daily average trading volume of approximately 950,000 shares. The previous day, the share price jumped 32 per cent in a single day. Consequently, the stock is in overbought territory with the RSI (relative strength index) of 76. Generally, an RSI reading at or above 70 reflects an overbought condition. The share price may need to consolidate, trade sideways, in order to digest this parabolic move before climbing higher.
The next major ceiling of resistance around $14. On a pullback, the stock price has downside support around $10.
The Breakouts file is a technical analysis screen intended to identify comp
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 indexes 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.
Editor’s note: An earlier version of this story stated Curaleaf management targets having over 70 dispensaries by the end of 2019, up from 42 currently. If fact, there are 43 currently.