It’s been a big December so far for cannabis, with the Altria/Cronos news sending a strong signal to the broader market that cannabis is here to stay. As with any maturing industry, however, we’re seeing that not all cannabis companies are created equal–and they sure aren’t treated the same by the market.
Aleafia Health (TSXV: ALEF) (OTCQX: ALEAF) is one of the few Cannabis stocks that have held their 200 day simple moving average. ALEF compares favorably in that regard to WEED and HMMJ which have both broken below their 200 day SMA. ALEF is also solid vis-à-vis the Canadian Cannabis LP Index, which represents the publicly-traded market for the medical and legal marijuana sector in Canada. It includes Canopy Growth (TSX: WEED) (NYSE: CGC), Cronos Group (TSX: CRON) (NASDAQ: CRON), Aphria (TSX: APHA) (NYSE: APHA), and many more.
What’s up with Aleafia? Well, Aleafia wasn’t first to the party, and that seems to be serving it well. Competitors expanded too quickly, and they weren’t wise about collecting data to drive decision making. The ancient wisdom of data processing (still relatively recent given the history of computing) tells us, “garbage in, garbage out,” i.e. bad or sloppy input won’t give you golden insight no matter how much your software chugs. For Aleafia’s competitors, they often don’t even have garbage, they’ve got next to nothing when it comes to ground-level consumer data based on real traffic to clinics. That’s what Aleafia has in spades.
Over-expansion problems are easy to spot–lower sales per location, middle management twiddling their thumbs because they aren’t fully utilized, and overall distraction from future opportunity because of decisions that were previously made in haste. Some follow the mirage and some don’t. Aleafia has the patient data to stay on top of its customer base, get smart about pursuing future customers, and then refine that data to feed an innovation process that is unique. Remember that since Aleafia is vertically integrated including licensed production, health and wellness services, education services, and commercial operations that include physical retail and online sales. They don’t need to go too big too fast in order to grow; they’re agile while standing on firm ground.
When it comes to value for investors, consider that in terms of enterprise value Aleafia is trading at just 1.4x 2020 projected earnings (EBITDA). That doesn’t reward Aleafia for its 50,000 patients and 2019 plans for increasing retention through online prescription orders and educational courses, and by trading it even with future earnings the market is apparently not pricing in partnerships and executive experience. It doesn’t seem fair, but hey, that spells opportunity for those who see it.
Other licensed producers such as Canopy and Tilray (NASDAQ: TLRY) have staked their growth prospects largely on legal and regulatory barriers to entry that they have helped maintain through back-channel maneuvering and lobbying, not savvy market moves. At this point, the dip in other companies may be the market saying that their competitive differentiation past is weak.
Aleafia is agile with access to its own data to make a move at the right time based on the right indicator. For example, its detailed and secure patient information database can help pinpoint demographic patterns in usage, fluctuations in demand, and product innovation candidates in close to real time. It is then up to Aleafia to turn the crank on its scientific and product development machine and generate revenue as quickly as possible.
Once that machine really starts whirring, Aleafia will be firmly positioned in the recognized leadership among its peers, and investors who saw its value clearly today will find themselves riding high and smiling big.
Image source: Shutterstock
Charts source: Barchart
Valuation chart source: Aleafia Investor Presentation (Page 11)
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