On today’s TSX Breakouts report, there are 23 stocks on the positive breakouts list (stocks with positive price momentum), and 15 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a company that appears on the positive breakouts list. Of all the stocks on the positive breakouts list, this one has the highest expected one-year price return – that stock is a cannabis producer. The average target price suggests that the share price may rise 72 per cent over the next year. The company is covered by six analysts, of which all six analysts have buy recommendations. The security highlighted today is Hydropothecary Corp. (THCX-X).

A brief outline is provided below that may serve as a springboard for further fundamental research.

The company

Gatineau, Que.-based Hydropothecary is a licensed marijuana producer.

The company’s current production capacity is approximately 3,600 kilograms of cannabis. However, this capacity will soon expand to approximately 25,000 kilograms with its new 250,000 square foot greenhouse facility expected to be completed this month. In addition, the company is constructing a 1-million square foot greenhouse, which is expected to be completed in December. Once completed, the company’s annual cannabis production capacity will increase to approximately 108,000 kilograms.

On April 11, the company announced a positive development, it signed a five-year agreement to supply cannabis to the Quebec market. Under the terms in the agreement with the Société des alcools du Québec (SAQ), Hydropothecary will have an escalating supply schedule. In Quebec, the SAQ will be responsible for the distribution of recreational cannabis through a subsidiary. Once recreational marijuana is legalized, the SAQ plans to open 20 retail outlets initially with the expectation that the number of locations will expand to 100 within the first two years.

Management held a conference call that day to discuss the deal with the SAQ. Chief Executive Officer and co-founder Sébastien St. Louis stated, “When we started in 2013, our idea was to capitalize on Quebec resources – water, electricity and people – to build a world-class company in the emerging legal cannabis industry. Our strategy was to be a leader in Quebec to win distribution in our home province first and then use this as a springboard to reach out to the rest of Canada and become a global player. We’ve now succeeded in the first part of that strategy, which is to lock up Que\bec. The supply agreement that we’ve just signed has a five-year term with an option for a sixth year. We’ll supply 20,000 kilograms of products in year one, followed by 35,000 kilograms in year two and 45,000 kilograms in year three. By the time we get through years four and five, this total volume under this contract could exceed 200,000 kilograms. That’s assuming a 10 per cent growth rate in years four and five.”

He added, “This agreement makes Hydropothecary the market share leader in Quebec out of the gate, and it gives us an opportunity to cement our position for the long term…In terms of revenue, this deal has a weight average on a byproduct basis of $5.40 per gram. That’s revenue to Hydropothecary. That means that for the full five-year term, this deal could be well in excess of $1-billion in sales. The agreement covers our full range of brands and products including flower, powder, pre-rolls, oils, sublingual sprays, and capsules. It also allows for the introduction of new innovative products, as regulations allow, like cannabis drinks. We’re currently serving the medical market with 20 different products. Under the contract with the SAQ, SQDC, we’ll be supplying 63 SKUs initially, and we expect to continue to grow our product portfolio very rapidly.”

Management believes it is one of the lowest cost cannabis producers given it has greenhouse facilities, as well as lower electricity rates in Quebec compared to its industry peers with operations located in Ontario.

Dividend policy

The company does not pay its shareholders a dividend.

Analysts’ recommendations

There are six analysts who cover this small cap stock and all six analysts have buy recommendations. More specifically, three analysts have “buy“ recommendations and three analysts have ‘speculative buy’ recommendations.

The stock has analyst coverage from the following firms in alphabetical order: Beacon Securities, Canaccord Genuity, Cormark Securities, Echelon Wealth Partners, Eight Capital and GMP Securities.

Revised recommendations

In April, Robert Fagan, the analyst from GMP Securities, raised his target price to $8.50 from $7.75. Vahan Ajamian from Beacon Securities took his target price up to $9.50 from $8.50. Matt Bottomley from Canaccord Genuity lifted his target price to $6.25 from $5.75.

Financial forecasts

Robust growth is forecast for this company.

The consensus revenue estimates are $9-million in fiscal 2018 (the company’s year-end is July 31), and forecast to jump to $108-million in fiscal 2019 and $295-million in fiscal 2020. The consensus EBITDA (earnings before interest, taxes, depreciation and amortization) estimates are $23-million in fiscal 2019 and $115-million in fiscal 2020. In terms of earnings per share, the Street is anticipating the company to report 5 cents in fiscal 2019 and 42 cents in fiscal 2020.

Over the past several months forecasts have increased. To illustrate, three months ago, for fiscal 2019, the Street was anticipating revenue of $84-million and the consensus EBITDA estimates was $18-million.

Valuation

Given that the company is not expected to generate significant earnings per share for several years, the stock can be valued on an enterprise value-to-EBITDA multiple basis.

The consensus one-year target price is $7.42, implying the stock price may appreciate 72 per cent over the next 12 months. Target prices range from a low of $5.50 (from the analyst at Echelon Wealth Partners) to a high of $9.50 (from the analyst at Beacon Securities). Individual target prices are as follows in numerical order: $5.50, $6.25, $7.25, $7.50, $8.50, and $9.50.

Insider transaction activity

In April, two insiders were sellers in the market.

Most recently, on April 30, Chief Financial Officer Ed Chaplin sold 10,000 shares at a price per share of $4.28 and on April 26, Mr. Chaplin sold 20,000 shares at a price per share of $4.245. After these transactions, his portfolio held 63,000 shares.

Prior to that, on April 12, Chairman Dr. Michael Munzar divested 250,000 shares at a price per share of $4.0278 for an account in which he has indirect ownership (159927 Canada Inc.), reducing his sizeable portfolio position to 1,872,866 shares.

Chart watch

Year-to-date, the stock price has increased nearly 6 per cent. For the past three months, the share price has been trading in a range, between $3.50 and $4.30, and is currently at the upper end of that band.

There is a ceiling of resistance around $4.50. Should the share price break above the $4.50 level, the stock price could rally to $5.

On a pullback, the stock price has support around $4, near its 50-day moving average (at $3.99). Failing that there is strong support around $3.50.

This small-cap stock, with a market capitalization below $1-billion, is relatively liquid. The three-month historical daily average trading volume is approximately 3.2-million shares.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Positive Breakouts May 3 close

ABT-T Absolute Software Corp $7.25

ATP-T Atlantic Power Corp $2.88

CFW-T Calfrac Well Services Ltd $7.35

CPX-T Capital Power Corp $25.02

KOR-T Corvus Gold Inc. $2.92

DIR.UN-T Dream Industrial REIT $10.36

FR-T First Majestic Silver Corp $8.74

FNV-T Franco-Nevada Corp $94.06

HWO-T High Arctic Energy Services Inc $4.15

THCX-T Hydropothecary Corp. $4.32

IIP.UN-T InterRent REIT $10.36

KEL-T Kelt Exploration Ltd $8.42

KL-T Kirkland Lake Gold Inc $23.21

MEQ-T Mainstreet Equity Corp $42.00

MRD-T Melcor Developments Ltd $15.03

NCC.A-T Newfoundland Capital Corp Ltd $14.28

NPI-T Northland Power Inc $23.63

NVA-T NuVista Energy Ltd $8.76

PKI-T Parkland Fuel Corp $31.39

SW-T Sierra Wireless Inc $22.96

SSRM-T SSR Mining Inc. $13.29

TGZ-T Teranga Gold Corp $5.14

TGL-T TransGlobe Energy Corp $2.46

Negative Breakouts CF-T Canaccord Genuity Group Inc $5.86

CHR-T Chorus Aviation Inc $7.52

ECN-T ECN Capital Corp. $3.38

EXE-T Extendicare Inc $8.11

ITP-T Intertape Polymer Group Inc $19.28

MMX-T Maverix Metals Inc. $1.54

MAXR-T Maxar Technologies Ltd. $55.75

TPX.B-T Molson Coors Canada Inc. $93.00

MTY-T MTY Food Group Inc. $45.55

NGQ-T NGEx Resources Inc $1.01

RSI-T Rogers Sugar Inc $5.28

SOT.UN-T Slate Office REIT $7.46

RAY.A-T Stingray Digital Group Inc. $9.50

TCS-T TECSYS Inc. $15.30

UNS-T Uni-Select Inc $19.56