While there are plenty of cannabis stocks that are trading below their IPO price, there are very few that have fallen as far as Emerald Health Therapeutics (TSXV:EMH) has.
Cannabis stocks have been on a wild ride during July. We saw a quick 15% gain for GW Pharmaceuticals, a mini-fall for Canopy Growth, and a nice recovery for Aurora Cannabis. But the early return for one of the sector’s most undervalued companies may be the best yet.
First, let’s take a look at the name of the company. Cannabis Science (CBIS) is based in Salt Lake City, UT and is one of the best performing stocks on the NASDAQ. It has been a favorite penny stock in the financial media, but due to the size of the company it has been unable to break out to the next level. Now that it has stopped spending money on new product development, it has been able to focus on the business and the results are showing.
Jazz Pharmaceuticals (NASDAQ: JAZZ) is a hybrid of a pharmaceutical and a cannabis company. It used to be a pharmaceutical business that was humming along and putting up some impressive statistics. That changed when it bought GW Pharmaceuticals earlier this year. It has become an even more appealing growth company with enormous potential now that it possesses the sole cannabis-based medication (Epidiolex) that the US Food and Drug Administration has authorized.
While the company’s latest earnings announcement disappointed investors, sending shares plunging, there are plenty of reasons to stay optimistic on the stock. And, considering that Jazz stock is now selling at its lowest price of the year, this may be a good moment to invest.
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Acquisition-related costs blemished the company’s results report.
Jazz’s second-quarter financial report didn’t seem promising at first sight. The company’s net loss of $6.11 per share for the quarter ended June 30 was terrible, particularly when contrasted to the prior-year quarter’s diluted profit of $2.07 per share. A deeper examination of the earnings report, however, uncovered several major factors that led to the dreadful bottom line:
- Sixty-six million dollars was spent on an inventory fair-value adjustment, which inflated product sales costs.
- The purchase of GW Pharma cost the company $129.5 million in selling, general, and administrative expenditures.
- The remeasurement of its deferred tax obligation resulted in a $251.4 million charge, which Jazz claims was mainly due to the purchase.
This indicates that the figures were unusual and unlikely to occur again. And there were some positives to take away from the earnings release for investors.
New medicines are helping, and additional chances for development may be on the way.
The company’s revenue for the quarter was $751.8 million, up 34% over the same time previous year, thanks to the introduction of its cancer-fighting medication Zepzelca in July 2020. This quarter, it provided $55.9 million to the top line (versus nothing a year ago). The medication received expedited clearance from the FDA last year, and Jazz is planning several studies, including a confirmatory study for small-cell lung cancer.
The business additionally benefitted from $109.5 million in Epidiolex sales (which didn’t even cover a full quarter of revenue since the acquisition of GW Pharma was completed on May 5). Jazz believes Epidiolex sales increased 32% year over year on a pro forma basis. The FDA has authorized Epidiolex for a variety of seizures-related conditions, including Lennox-Gastaut syndrome, Dravet syndrome, and tuberous sclerosis complex. Next year, Jazz plans to begin phase 3 studies for a new indication (epilepsy with myclonic-atonic seizures).
Is the stock a good buy?
Jazz’s stock was trading at more than $170 prior to the results announcement. It’s now trading at $140 and is on the verge of plummeting much worse. In September 2020, it fell below $140 for the first time.
It has a forward price-to-earnings ratio of 10 right now. Given how many cannabis and pharmaceutical companies aren’t profitable, that’s not a very high multiple to pay. And when compared to some of the industry’s larger brands, the stock is much less expensive:
YCharts’ JAZZ PE Ratio (Forward) statistics.
Jazz may be a fantastic purchase as a healthcare business with tremendous upside in the cannabis industry. Multiple analysts have set price targets of more than $200 for the company, implying a 40% gain if purchased at $140 or below.
Should you invest in Jazz Pharmaceuticals?
Grand View Research predicts that between now and 2027, the worldwide cannabis medicines sector would expand at a stunning compound annual growth rate of 76.8%, reaching a value of $5.8 billion. It’s a market that may see a lot more development if federal marijuana legalization is implemented in the United States, which could happen soon.
Jazz is a solid investment with solid foundations. Despite the fact that it is coming off a poor quarter, it has historically been a safe option to make a profit. In the long run, tapping into the cannabis industry may open up even more opportunities for the company. Jazz may be your ticket to some excellent long-term profits without taking on too much risk, whether you’re a cannabis investor or searching for a potential growth prospect.
David Jagielski is not a shareholder in any of the companies listed. Amgen is a stock that The Motley Fool recommends. There is a disclosure policy at The Motley Fool.
The author’s views and opinions are his or her own and do not necessarily represent the views and opinions of Nasdaq, Inc.
The marijuana industry has had a rough year. Prices have fallen, production difficulties have plagued several major companies, and the federal government is actively targeting the industry. That leaves investors with a choice: stick with the companies that have been around for a while, or take a chance on the next hot stock.. Read more about stock jazz pharmaceuticals and let us know what you think.
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