Be fearful when others are greedy, and be greedy when others are fearful.



- Warren Buffett

The vaping product regulatory failure in the U.S. has led to as many as two thousand serious respiratory illnesses and dozens of deaths. U.S. regulatory headwinds are still impeding cannabis expansion and reducing operational synergies/efficiency.

United States

Total revenues grew by 28% from Q2 to $61.8 million

Gross profit increased by 33% from Q2 to $34.7 million

Adjusted EBITDA increased from $3.3 million (Q2) to $9.0 million

Gross margins on cannabis sales increased from 40% (Q2) to 47%

Net loss shrank from $24.5 million (Q2) to $6.8 million, ~75% reduction

Total pro-forma revenues of $30.9 million (up 23% from Q2)

Reported revenue of $22.3 million (up 16% from Q2)

Gross margins remained strong at 48.1% (up from 47.9% in Q2)

Gross profit rose 16.8% to $10.7 million (from $9.2 million in Q2)

Canada

Regulatory certainty

Acceleration in cannabis store-openings and a critical mass of stores

Consistent double-digit monthly revenue growth

Cannabis 2.0 brings a 50% increase in consumers along with a huge influx of cannabis derivative products

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Revenues rose to CAD$43.4 million, up 38% versus Q2

Adjusted EBITDA rose by 31% to CAD$10.1 million

Gross profit rose by 30% to CAD$14.8 million

Net income (before tax) increased by 32% to CAD$5.4 income

There is currently an enormous disconnect in the cannabis space.The market for cannabis stocks is a train-wreck. Overall valuations are now at a greater than two-year low.The cannabis industry (especially in Canada) is a completely different story. Revenues are increasing at a robust rate. Cannabis retail stores are opening at an accelerated pace. And increasing numbers of companies are already making the transition to profitability.As noted in Part 1, there istoday with respect to the emerging legal cannabis industry. What should cannabis investors do?Another well-regarded value investor has offered his own thoughts here.Contrarian Investing 101.There is plenty of “fear” in the cannabis space today.Currently the “greed” in the sector is represented by the army of short-sellers– despite the greater-than-two-year lows.The first installment addressed the market factors behind this. Part 2 will provide guidance to investors on how to capitalize on this market carnage.In general terms, The Seed Investor currentlyfor cannabis investment opportunities. Despite the much larger overall market for cannabis in the United States, serious obstacles continue to negatively impact cannabis companies and investor returns.Deaths/illnesses from (tainted) black market vapes should have been an immediate catalyst in the U.S. for cannabis legalization. Instead, it has been used as a pretext to drive down the valuations of (innocent) legal cannabis companies.At every level of U.S. government, lack of regulatory support for the legal cannabis industry continues to take a heavy toll. In particular, the refusal of local governments to license legal cannabis businesses (in cannabis-legal states) is crippling the legal industryThat said, there are some individual U.S. industry leaders that are well-positioned. They boast strong management teams and are already generating robust revenues.Because of regulatory issues, U.S. cannabis valuations are discounted relative to even the low valuations of Canadian cannabis stocks. This means that most cannabis investors will want to have some near-term exposure to the U.S. market.In Canada, The Seed Investor has previously expressed a preference for. Apart from those companies, a few of the diversified LP’s also look attractive, for specific reasons.While outstanding value opportunities exist across the cannabis space, additional consideration has to be given to tax-loss selling. The deep trough in cannabis stocks and relentless declines in 2019 make cannabis stocks prime candidates for this tax avoidance strategy.For this reason, we should expect the recovery in cannabis stocks to be led by the strongest performers. They are the companies that will likely face the least tax-loss selling pressures at the close of this year.Given all these parameters, here are some suggestions for cannabis investors.With all the regulatory uncertainty in the U.S. and current market conditions, this is not the time for cannabis investors to be excessively speculative in adding to their U.S.-based cannabis positions.It is the industry leaders that will very likely lead the Next Rally. Fortunately, even the leading U.S.-based companies are currently heavily discounted.The largest publicly-listed U.S. multi-state operator (MSO) has just reported its. As with its Q2 results, there was plenty for investors to like.The last item in particular will be welcome news to Curaleaf shareholders. In the Company’s generally strong Q2 results, the one concern was a widening loss. It rose from $10.2 million (Q1) to $24.5 million. In Q3, Curaleaf has more than reversed that performance.Combining the increase in revenues with the increase in margins and shrinking loss, Curaleaf is on a clear path to profitability. Indeed, management referred to an “inflection point reached” in several of Curaleaf’s key state markets.Most importantly, shareholders are being rewarded for these strong results.Curaleaf closed up over 15% on Wednesday's news. Even more significantly, CURLF is now up 37% since bottoming at US$4.64 on November 6th. That’s a substantial rebound in the span of two weeks.Going forward, Curaleaf stands to be one of the strongest beneficiaries in the U.S. from any positive regulatory movement, because of both its greater mass and diversification. Adding to Curaleaf’s upside is its acquisition of Illinois-based Grassroots (“the largest private U.S. MSO”).While Curaleaf isn’t as cheap as it was even when Part 1 was published a week ago, it remains roughly 45% below its 52-week high. For an industry leader now approaching profitability, that should still be enough of a discount to whet the appetites of investors.As with Curaleaf, the thinking here is size and stability. iAnthus is also a leading MSO and generated significantly better results than Curaleaf in its. Late Wednesday, iAnthusWhile Curaleaf gained momentum in the third quarter, iAnthus’ growth slowed somewhat. That said, operating results were still very strong.iAnthus was up nearly 15% Wednesday in anticipation of Wednesday’s results. Even with that gain, the stock is still down more than 75% from its 12-month high. That's a heavy discount for such a strong operational performance.The Company’s MPX product line is performing well. It backstopped its balance sheet with up to $100 million in financing from Gotham Green Partners. It now operates a total of 27 dispensaries.It will be interesting to see whether iAnthus is able to hold onto today’s gains (or even add to them). Cannabis investors will also be watching intently to see if Curaleaf sees any follow through after its strong gain on Wednesday.With valuations so compressed across the cannabis space, there are certainly other U.S.-based companies that present stellar value propositions.(CAN:SLNG / US:SLGWF) will attract the interest of many investors as the U.S.’s cannabis branding leader.(CAN:CWEB / US:CWBHF) is the established leader in U.S. hemp and will be a prime candidate for those wanting exposure to the U.S. hemp industry.As noted above, Canada currently represents the most attractive jurisdiction for cannabis investing for four principal reasons:Yet Canadian-based cannabis stocks have been losing just as much ground as U.S. stocks. This is particularly incredible given that there was no (rational) reason for Canadian-based cannabis companies to lose value as a result of the U.S.’s tainted vaping issue.Equally incredible, even with the extremely promising prospects for Phase 2 of legalization (now weeks away from commencing), valuations have continued to go straight down. Part 1 addressed this market perversity.For investors, it means even more/greater value opportunities.The three best reasons to invest in META?The redundancy is merited. Calling National Access “undervalued” is inadequate.This is Canada’samong Canadian cannabis retail companies. The Company now operates 35 retail cannabis stores in Canada.It is also the clear revenue leader among cannabis retailers with revenues of >CAD$60 million in the first year of legalization. META is targeting 40 stores by the end of 2019.Its rapid growth has not come at the expense of operational efficiency. National Access has generated cumulative gross margins of 32% and has already recorded positive adjusted EBITDA in its latest quarter.Then there is the chart.META was launched in time to benefit from the end-of-year rally in 2017. However, as an industry leader, the Company retained its value well, right until it began reporting its strongest operational results – at which point its share price collapsed.National Access is one of theof Cannabis 2.0 in Canada. Yet with a market cap of only CAD$35.6 million, it is currently trading at roughly one-half its annual revenues.Even trading at 3X revenues, National Access would be a five-bagger from its present value. That is a very stingy multiple for a high-growth company in a high-growth sector that is an industry leader – and approaching profitability.Many investors will see MediPharm asversus(CAN:VGW / US:VGWCF), Canada’s other cannabis extraction leader. Both boast rapidly increasing scale, strong margins, and early profitability.MediPharm gets the nod simply as the most recent of the two to report. In its just-released Q3 2019 results:MediPharm’s “reward” for this extremely strong quarterly performance? Its share price has fallen to $CAD$4.00 – little more than half of its 2019 high of CAD$7.39.Canada’s extraction specialists benefit from the capacity to service the entire Canadian cannabis industry. This has allowed these companies to scale-up rapidly, with confidence.Even as increased competition in cannabis extraction has caused a drop in prices for cannabis oil, MediPharm’s margins have remained steady. They ticked down slightly in Q3 from 36% to 34%.MediPharm is already using its size/scale to enter international markets. Its Australian subsidiary has received its manufacturing license. This is a well-managed company that has executed strongly and also screams “value”.Including Aphria as a value opportunity is a no-brainer. The #1 criticism leveled by the vacuous minds of the mainstream media toward Canadian LP’s is “lack of profitability”.This is nonsense, in an emerging industry with a (full) market that is only one year old. Be that as it may, media yammering for profitability is not going away.Withnow behind it, Aphria is immune to this criticism. Despite that, Aphria has been sold down just as ruthlessly as other Canadian LP’s.This is a Company that was (already) penalized harshly by the market in 2018 for corporate governance issues. Despite an extremely strong operational performance since that time – and consecutive profitable quarters – Aphria is well off its 2019 high.In turn, this is well off Aphria’s 2018 high, which is well below the 2017 high. But has a turnaround started?After bottoming at $3.80 on November 18th, APHA has bounced higher by 18% in the last two trading sessions.Cannabis stocks are so low that investors might be able to make lots of money “stock-picking” wearing a blindfold and throwing darts at the wall.Precious metals stocks were similarly depressed at the beginning of 2009.By early 2011, the entire sector had recorded a ten-bagger.DISCLOSURE: The writer holds shares of MediPharm Labs and Valens GroWorks.