Add this undervalued cannabis stock to your watchlist now

Speaking of a green thumb, it is easy to imagine the fruits of their labor in the garden, perhaps in the form of a greenish heirloom tomato supported by a limp vine. But when it comes to agribusiness, success with one crop may not be a guarantee that another crop will be grown and marketed efficiently.

This is exactly the dilemma that is faced Village Farms International (NASDAQ: VFF), a vegetable company that started selling cannabis to benefit from its indoor growing expertise. While marijuana has not been proven to be as profitable as tomatoes can be grown, shareholders are already satisfied thanks to the rapid growth in sales and the prospect of entering the U.S. cannabis market. Because of the volatility of its earnings, this stock isn’t for everyone – but I’ll get into that in a moment.

Image source: Getty Images.

Why this stock is worth watching

Village Farms deserves a spot on your watchlist for a number of reasons.

The first is that the market may undervalue the stock by adding too much weight in the short term. While Village Farms grew its total revenue 63% year over year last quarter, it also saw Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) decrease 63%. The stock price is still down from its highs earlier this year due to those poor gains, but the company’s capabilities have only increased over time, and history has little more to offer. Since the company generates most of its income from the sale of products, fluctuations in market prices for vegetables can make waves.

Historically low tomato prices are more responsible for the recent slump in yield than a decline in operational efficiency. If tomato prices rebound, Village Farms stocks should rebound too. But unless you’re an oracle in the tomato market, it’s hard to tell when that might be exactly.

Additionally, the company has no shortage of other ways to generate cash flow outside of selling tomatoes and cucumbers. Its cannabis business, Pure Sunfarms, grossed $ 17.4 million in the first quarter of 2021. Given that those sales are already sizeable compared to its $ 34.9 million in production revenue, it is entirely possible that the company’s reliance on tomato price developments will be significantly reduced. Forward. This is good news for investors because it makes the bottom line more resilient. However, you also need to worry about the impact of the price of cannabis as well as the price of tomatoes.

Regardless of plant prices, Village Farms also has a large number of outstanding warrants created during the direct share offering registered in September 2020. Most recently, it earned $ 17.7 million in cash from some of the warrants exercised. There are still more than 1.65 million of these warrants outstanding, meaning there is potentially much more revenue to be earned. It’s unclear whether the market has properly priced in the value of these warrants, given their proven ability to outperform the company’s cannabis segment in a single quarter.

Finally, the price-to-book ratio (PB) suggests it is undervalued. The agriculture sector has an average PB of 3.21, which is slightly higher than Village Farms’ ratio of 2.28 last quarter. This means that investors get slightly more book value for each share with the stock than with an equivalent investment in the industry.

Why not buy today?

If you are principled to bet that Village Farms’ cannabis business will pick up momentum in the next few quarters, there is no reason to invest in this business today. If first quarter cannabis sales are any indication, there is plenty of headroom for this stock to run with the help of bulk cannabis sales. However, if you’re not very risk taker, it’s probably a better idea to add it to your watchlist instead.

It is likely that at least some of the pricing problems in the tomato market are due to remaining craziness in the supply chain attributed to the coronavirus pandemic. Even if people in the United States feel that the pandemic is over, it is still a significant problem affecting most of the world. In other words, I don’t think it’s wise to predict that the tomato market is about to return to normal as it could take years. And in order to really increase the chances of this stock, tomato prices play a big role.

So keep an eye on Village Farms. If the stock starts to skyrocket after an earnings report, the time is right to consider a buy.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

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