Village Farms International Inc: A Top Pot Stock at a 50% Discount?

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This Pot Stock Could be an Opportunity

“Buy the dip” is a strategy that’s a lot easier said than done, especially when it comes to volatile sectors like marijuana. What often happens is that when a pot stock is soaring, people rush to buy shares due to their fear of missing out (FOMO). But when a marijuana stock is tumbling, no one wants to get in because of the fear that it might drop lower.

In other words, because of how we’re programmed emotionally, it’s more likely that we buy at the top than at the dip.

Of course, that doesn’t mean buying every dip is a winning formula. Sometimes sentiment turns bearish on a pot stock because of deteriorating fundamentals. And that’s usually not a good time to get in.

But when a solid marijuana stock is experiencing a pullback—and its growth theme remains intact—it could represent an opportunity.

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And that’s why I’d like to talk about Village Farms International Inc (NASDAQ:VFF).

Village Farms is one of the largest greenhouse growers in North America. It’s also one of the longest-operating greenhouse growers on the continent, having been around since 1989. Throughout most of its history, the company has been known for producing tomatoes, bell peppers, and cucumbers.

Today, Village Farms has five high-tech greenhouse operations—four in Texas and one in British Columbia, Canada—with a total growing area of approximately 500 acres. More than 80% of the company’s sales go to North America’s major grocers and big-box retailers.

And here’s where things get more interesting.

A few years ago, Village Farms International Inc formed a joint venture with Emerald Health Therapeutics Inc (CVE:EMH, OTCMKTS:EMHTF) for large-scale cannabis production. The joint venture was named Pure Sunfarms Corporation.

In November 2020, Village Farms acquired Emerald Health’s stake and made Pure Sunfarms its wholly-owned subsidiary.

Because the company also grows other greenhouse produce, Village Farms stock may not be as well-known as pure-play pot stocks. But Pure Sunfarms is a name to be reckoned with in the cannabis industry.

Pure Sunfarms Corporation is one of the largest licensed producers of pot in Canada, generating net cannabis sales of CA$76.1 million in 2020. It’s also one of the lowest-cost marijuana producers among Canadian greenhouse operators. It achieved an industry-leading gross margin of 40% last year. (Source: “Investor Presentation: May 2021,” Village Farms International Inc, last accessed June 22, 2021.)

Pure Sunfarms’ products are available in five of the six most populous provincial markets in Canada, reaching more than 70% of the nation’s population. The company has had the No. 1-selling brand (by kilograms and dollars) in the dried marijuana flower category at the Ontario Cannabis Store (in Canada’s most populous province) since Pure Sunfarms’ retail sales launch in October 2019. (Source: Ibid.)

Moreover, Pure Sunfarms plans to expand its footprint.

In Canada, the company’s 1.1-million-square-foot Delta 3 facility is currently in full production. Its 1.1-million-square-foot Delta 2 facility is expected to commence production in the third quarter of 2021, and it has another 2.6-million-square-foot Delta 1 facility that’s currently producing tomatoes but could be transitioned to cannabis if needed.

Don’t forget, Village Farms International Inc also has four facilities in Texas that can be rapidly converted for cannabis production.

While it won’t be easy for the company to expand its pot operations to the U.S., it said it’s “[d]eveloping multiple strategies to capitalize on favorable U.S. federal regulatory developments that would potentially allow VFF to legally participate in the U.S. cannabis industry.” (Source: Ibid.)

VFF stock also stands out due to the company’s solid financials.

Remember Pure Sunfarms’ CA$76.1 million of net sales in 2020? Well, the subsidiary also generated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of CA$18.0 million and net income of CA$13.8 million last year. (Source: “Village Farms International Reports Fourth Quarter and Year End 2020 Financial Results,” Village Farms International Inc, March 16, 2021.)

So, cannabis operations not only contribute a substantial amount to Village Farms’ total sales, but also boost its bottom line. And keep in mind that we’re still in a time when many cannabis operators are incurring losses.

In the first quarter of 2021, Pure Sunfarms generated CA$22.1 million of net sales, representing a 23% increase year-over-year. The subsidiary achieved its third consecutive quarter of sequential growth in retail branded sales—its priority sales channel—of 20% or greater. (Source: “Village Farms International Reports First Quarter 2021 Financial Results,” Village Farms International Inc, May 10, 2021.)

Pure Sunfarms also generated adjusted EBITDA of CA$3.1 million for the quarter, which was its 10th consecutive quarter of positive adjusted EBITDA. Considering that the cannabis industry is still at a nascent stage, that track record is truly impressive.

Village Farms International Inc (NASDAQ:VFF) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

Like many pot stocks, Village Farms stock had a huge rally toward the end of last year, but it has pared quite a bit of its gains since peaking in February 2021. Trading around $10.00 apiece, VFF stock is down by more than 50% since reaching an intra-day high of $20.32 on February 10.

I’m not saying this is necessarily a “buy the dip” opportunity, but for pot stock investors, Village Farms International Inc is definitely not a name to ignore.

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