How the market responded to Sunniva's third quarter results
Sunniva Inc. (CSE: SNN) (OTCQB: SNNVF) reported for the third quarter ended September 30, 2018. The market reacted as if there was disappointing news. (read full quarterly report here) Here are some things I saw:
Quarterly revenue of $3.8 million, a decline of 18% compared to the same quarter a year earlier. However, year to date revenue is $13.4 million, a gain of 30% over 2017. I note The Public Cannabis Company Revenue Tracker managed by Alan Brochstein and New Cannabis Ventures ranks the top revenue producing cannabis companies with industry sales of more than US$2.5 million per quarter. Thirty-seven companies currently qualify with 14 filing in CAN dollars. Of the Canadian dollar reporting companies, Sunniva ranks 9th ahead of names such as Namaste (11th), Cronos (12th) and Organigram (13th).
We should also remember that SNN hasn’t begun to sell their own cannabis yet. But there will be a substantial increase in sales over the next twelve months as revenue from growing comes on stream first in the U.S. and then in Canada. Not only that, profit margins will increase as oil production and cartridge sales utilizing oil made from SNN grown cannabis grows.
The “spin out” of Canadian assets will be an early 2019 event and not a late 2018 transaction which some investors found disappointing. However, Chief Executive Officer Dr. Anthony Holler confirmed in the quarterly report that the spin out will happen. The Canadian assets that will be spun out into a new company include: Natural Health Services Ltd. which owns the seven physician-based medical clinics and Sunniva Medical Inc. which is the licensed producer applicant and owns the 126-acre parcel of land in Okanagan Falls, British Columbia.
Given the transaction was confirmed, a few months one way or the other won’t matter much. In fact, given our expectation that the market will be soft until tax loss selling is completed after Christmas, it may prove to be an advantage to initiate the spin out in what expect will be a better market environment in early 2019.
Tax loss selling will probably impact SNN during the next three weeks as the stock is trading near its 2018 lows. My strategy for The Cannabis Report Model Portfolio, for example, will be to watch SNN for a buying opportunity. SNN is the second largest position in the portfolio which reflects my confidence in the company and its management and I will add more if an opportunity presents itself.
Conclusion: SNN is the second largest position in The Cannabis Report Model Portfolio which reflects my confidence in the investment. I keep asking myself, “If I had never heard of Sunniva and found it today, would I buy it?” The answer is “yes!” The stock market doesn’t know who owns SNN and who doesn’t. So as investors, we should make decisions in the same way. If you own SNN, keep it and perhaps consider averaging down. If you don’t own it I think if you do, you can expect solid returns over the next year.
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