Verano Holdings VRNOF stock The Most Undervalued Stock

Verano Holdings VRNOF stock may be one of the most undervalued marijuana stocks you can buy. When you look at the numbers and you compare what Verano earns versus the broader S&P 500, you see that this stock is very undervalued. By my calculation, there is a potential 500% upside opportunity in the stock should cannabis stocks be valued at the same metrics as other stocks.

To be sure, though, the markets are not going to ignore profits forever. The entire purpose of market participants is to pursue these profits. At some point, the market is going to catch on to what is happening in the cannabis market and buy into these opportunities.

Let me break down what I am looking at for Verano.

Verano VRNHF Stock Comparison

Here are the numbers for comparing the cannabis companies on my Complete List of Top 100 Cannabis companies:

  • #10 Market Cap: $1.6B
  • #53 Revenue Growth Rate: 4.2%
  • #12 Gross Margins: 64.3%
  • #3 Operating Efficiencies: 15%
  • #1 EBITDA/Revenue: 53%
  • #67 Cash/Debt Ratio: 10%
  • #3 Total Assets: $2.68B

The broader stock market is seeing about 22.5% for EBITDA versus revenues. The #1 slot for Verano is close to 150% more than what the broader market is keeping. This is significant and needs to be highlighted. But, there are many more metrics that I will be focusing on.

In addition, I am going to present the future outcome for Verano for the next four quarters.

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Verano VRNHF Stock Financial Data

I wanted to break down the financials right now and then show what the stock could be doing in the next few quarters.

Revenue

There was a slight 4.1% increase in revenue QoQ:

Verano Holdings Revenue
Revenue: For Complete Verano Holdings financial data visit VRNOF stock page

What we are seeing right now is more like the organic growth we need to see from the current foundation. 4.1% increase in revenue growth is very respectable for when you look at the S&P printing about 3.41% revenue growth rate. So, any mis-aprehension by the market that there was a slight drop in revenue is only looking at the top headlines and not digging thoroughly.

As I mentioned, I am putting together a projection at the bottom. I am using an approximate 5% revenue increase QoQ for the next four quarters. But, Verano has already announced even more acquisitions and this number is low. That simply means the numbers I provide are likely to be on the low side.

Gross Margins

Verano has been fairly consistent with gross margins. With even more acquisitions, they will be able to continue with that consistency:
Verano Holdings Gross Margins
Gross Margins: For Complete Verano Holdings financial data visit VRNOF stock page

Verano still has a ways to go as they grow into their current facilities. Plus, they are in the process of expanding new facilities and acquiring yet others. They will continually be able to grow into capacity for some time. For now, they are printing some top-tier gross margins.

It should be noted that the S&P 500 prints roughly 55% gross margins on average. With the 65% print, Verano is easily outperforming the broader market.

Operating Efficiencies

The #3 print for operating efficiencies is excellent:

Verano Holdings Operating Efficiencies
Operating Efficiencies: For Complete Verano Holdings financial data visit VRNOF stock page

In my projection, I used a higher number of 30%. Verano has not printed operating costs at 30% of revenue in two years. But, I wanted to keep this in line with the base foundation of the bigger cannabis stocks.

Given the operating efficiencies, Verano could easily add operating costs in sales and still be sitting at an excellent level. This would hopefully increase sales and be worth it.

And, again, the S&P 500 prints roughly 40% operating costs relative to the revenue. Yet another metric that Verano outperforms the broader market by a very long shot.

EBTIDA

At 53% of revenue, EBITDA is sitting at the #1 level when you look at all other cannabis companies:

Verano Holdings EBITDA
EBITDA: For Complete Verano Holdings financial data visit VRNOF stock page

The core business is keeping more and more of the revenue it earns from sales of products. When you factor in one of the lowest operating costs, Verano may be outperforming all other stocks by a long shot.

Net Earnings

Here is one metric that seems to bounce around a bit, but this has more to do with CapEx, M&A, and other outlying activity that has nothing to do with the core business:

Verano Holdings Net Earnings
Net Earnings: For Complete Verano Holdings financial data visit VRNOF stock page

The past four quarters have printed some $121M in net earnings. Off of 319M shares outstanding, that is an EPS of $0.379. If you factored in a rate of 100x future earnings, VRNOF would have been bought up to about $37.90. But, the market high was all of $28.00 for VRNOF.

An investor would have been able to purchase this stock well below its run-rate and earnings potential with a significant amount of margin of safety in the investment.

Even more, given future revenue and earnings, the stock is well below its valuation levels.

Cash On Hand

Verano has enough cash on hand simply because it is net earnings positive:

Verano Holdings Cash On Hand
Cash On Hand: For Complete Verano Holdings financial data visit VRNOF stock page

At the same time, Verano has the ability to borrow some $110M for running operations and doing M&A deals. Still, they would not need to do this simply because there is enough cash available to run the business. And, since Verano is net earnings positive, they have no real problems with access to cash.

Cash:Debt Ratio

Verano Holdings has very little debt. Simultaneously, with the low cash level, they also have the ability to borrow what they need should they need to; they have an ultra-low interest rate credit facility:

Verano Holdings Cash Debt Ratio
Cash Debt Ratio: For Complete Verano Holdings financial data visit VRNOF stock page

Without a lot of debt, the fact they have a low amount of cash washes out. Factor in the ability for Verano to borrow when they can, their position is solid for advancing the companies stated goals.

Total Equity

There was a big jump in equity after some acquisitions earlier:

Verano Holdings Total Equity
Total Equity: For Complete Verano Holdings financial data visit VRNOF stock page

As I always state, assets are the engine to drive future growth in revenue and, by extension, profits. The big jump puts Verano Holdings in a solid position relative to its market capitalization, cash position and capabilities, and its revenue and profit potential.

Verano VRNOF Stock Chart

While we have seen some nice moves upwards in the most recent trading days, cannabis stocks are still very low comparatively:

Verano Holdings VRNOF Stock Chart
Verano Holdings VRNOF Stock Chart

I am hopeful, along with every other investor in cannabis, that we have seen the bottom of the latest selling in cannabis stocks.

But, I look at this as an opportunity, more than anything. Look at the valuations you would receive if you bought the broader S&P 500 market. Then, compare that to the current stock price Mr. Market is offering cannabis investors with VRNOF. This is an excellent opportunity. And, the margin of safety is much greater than the S&P 500.

Plus, there is the future potential of this stock that I like the most.

Is Verano Holdings VRNOF Stock a Good Investment?

Verano Holdings just printed about $207M. My expectation is that they print about $1B over the next four quarters to include Q4 2021, and the first three quarters of 2022 (Note: We do not have guidance for this and I expect revenue will actually be higher than just $1B).

Given the 35% cost of goods Verano consistently prints, with a modest 30% in operating costs (double what they just printed of 15.5%), and a 10% continuing cost which is about the norm for the industry, Verano has about a 75% cost of revenue for net earnings. This is about a 25% net earnings percentage, about double the S&P 500.

At $1B in revenue, that is $250M in net earnings. There are 319M shares outstanding. With the shares outstanding and the net earnings, you are looking at some $0.784 EPS over the next year on $1B and modestly comparative margins.

At a 100x future earnings, a multiple that may be low for a company with such excellent metrics, this puts VRNOF stock at $78.40 per share. Mind you, I doubled the operating costs for this projection: Verano has not printed such high operating costs relative to revenue in over two years. Plus, I used 10% continuing costs. Verano has very little debt. Given that, the 10% is likely to be high, also.

This stock could easily be much higher if the stock market would value VRNOF earnings the same way it values the broader market.

The stock market will not ignore profits forever. I expect we will see movements higher.

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2 thoughts on “Verano Holdings VRNOF stock The Most Undervalued Stock

  1. I bought Verano prior to earnings in hopes of a nice jump in share price, only to find out that there was a huge share unlock that caused massive dumping of shares. For investing in cannabis one must know more than just the fundamentals of a company, particularly in this sector. The following are just some of the considerations, outside of fundamentals, are:
    1. Share structure and unlocks. Many of these companies have this complex structure involving superordinate shares, a large percentage held by insiders (e.g. Curaleaf), which can lead to relentless selling (we saw this with Kadens in Green leaf).
    2. Legal issues due to criminal unethical activity (e.g. CannTrust and Ascend (LUFF)
    3. Headline risks (e.g. Trulieve and indictment of River’s husband)
    4. Progress/setbacks on the legal front
    5. Machinations on the OTC (naked short selling, manipulation by market makers, brokers, etc)
    6. Poor understanding of the sector by retail and media (why does CNBC always post Canadian tickers when talking about the US?)
    7. Massive short selling (many MSOs have over 50% of trades as short on some days)
    8. The need to be aware of the “sell the news” sell-offs, such as was seen after the release by congresswoman Mace on the GOP States Act.

    It would be nice if analysis of cannabis companies included a consideration of the above when making recommendations. For example, I would like to have known about Verano’s share unlock before jumping in last week to accumulate shares. This was knowable if I had done my DD (my bad), but it would have been nice if this was pointed out by those who are promoting this stock.

    I get the feeling that the focus on fundamentals only seems to miss these important influences on more near-term price movements. One could do better by taking all of this into account and finding better entry points.

    Just my two cents. I appreciate the good info provided by Cannabis investing newletter!
    Mark

  2. Hi Mark…

    Thanks for the comment.  First, ALL cannabis stocks fell and I do not believe that Verano had the monopoly there.  Nonetheless, from now on I am incorporating share information into my videos as well I am going to post a video up coming on Monday regarding short-selling and cannabis stocks.  This is the real story that is going on.  Every day, over 50% of daily volume is short selling.  This continues to pressure stocks.  I am going to put these data points into the videos as well I am building things up inside the website so that all can see what is going on with short selling.  Tons of work, and unfortunately, I am a one-man show.  Right now, I am sitting in a library and about to put together the data and charts on all 100 stocks showing the various financial data charts on all the companies.  On Saturday, I am going to do the short selling charts.  Then, Monday, look for the video.  

    Thanks again for the comment.  I think this contribution to the analysis will greatly enhance people’s understanding of what is going on.  

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