It hasn’t been pretty for the previously on-fire cannabis industry this summer. In fact, after a terrible July, this group of young stocks suffered a devastating August.
With everything from Canopy’s abrupt firing of its CEO to CannTrust’s busted illegal production operations still on investors’ minds, it’s clear they weren’t ready to jump back in just yet.
While there’s still just as much long-term opportunity here, the market’s recent volatility has forced restraint in how we should approach the pot industry.
Constellation’s harsh firing of Canopy’s chief Bruce Linton for excessive spending without any recognized profits is the clearest example of what investors are looking for. Profits, a path to profits or at least some capital conservation has replaced the previous drive for these companies, which was to grab at as much market share of this expanding industry as possible.
For the most part, this market share grab is dividing up the producers… Canopy, Aurora, Tilray, Cronos, etc. But for those simply looking at more ancillary plays, it’s been a very different summer.
For instance, GrowGeneration is a small-time cannabis growing supplier – hydroponics, soils, lighting, etc. Instead of growing weed, it sells the materials needed to grow that weed.
It competes with Scotts Miracle-Gro’s much larger cannabis related Hawthorne Gardening subsidiary. Yet with few other competitors, GrowGen has been able to expand while keeping a lid on its spending. You can see its successes rewarded:
This alternative approach to cannabis investing, and therefore avoiding the margin-destroying fight for market share, offers us our best opportunities for September.
You see, while there seems to be a slight uptick across the industry since the end of August’s wrath, it doesn’t fundamentally change how investors are seeing cannabis stocks. The only real earnings announcement for the industry comes from Aurora. But that will be enough to reinforce this search for profits.
So, as we enter fall and investors come back to the market, we need to keep this restrained, alternative approach to cannabis to profit the most. Producers, while important for a long-term cannabis strategy, aren’t the only path to gains right now. In fact, they aren’t a very good one at all.
That’s why for this issue of Pot Stocks of the Month, we’re focusing on downstream plays. Producers will continue to fight over how much they can produce and where. But at the end of the day, those that package and actually sell those products to customers are just as important… and operate in a far less competitive marketplace.
The two we found this month do just that. One is a leading packaging and end-use products supplier. The other operates the retail side of the industry… in the fastest growing market, right here in the U.S.
Let’s get right into it.
Pot Stock of the Month No. 1: KushCo Holdings Inc. (OTC:KSHB)
Certainly not as sexy as a large-scale producer like Canopy, KushCo still solves a crucial piece in the cannabis puzzle. Without its containers, papers and vaporizer hardware, the customers wouldn’t be able to buy or use any of that product.
But KushCo is far more than just a glamorized bottles-and-rolling-paper company. It provides to upstream users too… those producers themselves. It sells solvents and hydrocarbons, CBD extraction equipment and more. Without these, the producers would be sitting on acres and acres of cannabis plants… but no actual product.
So, you can see this ancillary play offers crucial components to get pot from seed to store. Of course, this necessary piece of the pot puzzle doesn’t seem greatly protected. Couldn’t anyone start selling these things? Yes and no.
Yes, it competes with others. In fact, it competes with the producers themselves who have scaled up their operations to include both upstream and downstream segments. But that also presents an opportunity. I’ll touch on that in a second.
On the flip side, KushCo’s business does come with some economic moat worth speaking of. While others are just throwing everything at the wall and seeing what sticks – as Canopy’s Linton can attest – KushCo has been around for ages. In fact, this company has been producing packaging and products since 2010.
It has relationships with the medical marijuana sector. It has long ties to CBD product companies. And these offer insulation from new competition as sustained ongoing cash flows.
But we can’t ignore what the booming business right now is doing for it. Over just the last four years, sales have shot up from $4 million to $52.1 million. That’s before Canada even legalized. So, expect the numbers from the fiscal year that just ended to be absolutely massive. It’s already passed the $100 million sales mark in just the first three quarters.
To be fair, it suffers from the same situation that has plagued the producers of the industry. These fast-growing sales haven’t yet filtered down into any kind of real profits. But that’s coming. And with fewer direct competitors and loads of recent deals, sooner than you might expect.
Of course, there’s another major way to profit from a stake in KushCo.
As noted, it does compete with producers looking to brand and control their own packaging. But these expenses are the opposite of what their investors are looking for right now.
Instead, acquiring an experienced company to handle all of that for them, complete with hundreds of millions in extra sales, supplies for the production itself and partnerships with medical marijuana researchers and retailers seems like an idea that should be on the table.
Right now, after the terrible summer, these companies could even be looking at KushCo with more greedy eyes. The company is down 29% so far this year, compared to a flat performance for much of the rest of the industry. So, a quick buyout now could be something worth considering.
Of course, no play in the pot industry is without some risk, especially right now. We’ve already noted that it’s yet to turn a profit. That could keep prices down until investors’ stomachs harden. But so could the company’s source of revenue.
With the recent fury and panic over the health problems in association with vaporizers, especially those for THC and CBD, the company’s revenue mix looks a little less great than it did a few weeks ago. 69% of its third quarter revenue came from its vape products. That will inevitably change as other products hit the market. Edibles, for instance, are only now set to go in stores up in legal Canada. But for now, vape hardware does make up a large portion of KushCo sales. So, keep that in mind.
In any event, this company offers exactly what investors should be looking for… cannabis profits without gambling on the producers, while they remain so out of favor.
In both the near- and long-term, KushCo offers alternative cannabis businesses. And while corporate profits aren’t here just yet, investors profits should be any day now… especially if the producers themselves get greedy and push for a buyout.
An investment here is one that gives you a stake in a market leader, with nearly a decade of experience and sales growth investors can’t ignore.
Action to take: Buy shares of KushCo Holdings Inc. (OTC:KSHB) to get into an incredible growth story in a non-producer, right at the best possible time.
Pot Stock of the Month No. 2: MedMen Enterprises Inc. (OTC:MMNFF)
This second play for the month might be more familiar to you if you happen to be a consumer of marijuana or CBD yourself. MedMen is a retailer, one with a sizable early footprint in the areas of the U.S. where recreational marijuana is already legal.
Producers are great and all. But the companies on the front lines of the cannabis boom are the retail stores… even now, in the early days of it.
We can’t point to the importance of this early footprint enough. While certain states have opened up the product to buyers, it hasn’t been as simple for sellers.
You see, right from MedMen’s own words, you can see what is at stake:
“…the limited number of licenses that are issued to retailers in our core markets creates a regulatory barrier to entry for new operators. For example, in the entire state of New York, there are only 10 total master licenses, which allow for four retail stores per license holder. In the City of Los Angeles, there are fewer than 200 retail licenses available for a population of over 10 million residents and 40 million tourists visiting the county annually. The limited number of licenses provides outsized economics for first-movers like MedMen who now hold these licenses.”
That last line is crucial to understanding this play. MedMen is already there… in LA and New York. It recently moved into Florida, a huge opportunity going forward worth an estimated $1.4 billion annually starting in 2021. In total, the company operates 37 stores in 12 states.
But the more important number to know is its 92 retail licenses already bought and paid for. Meaning the company can nearly triple in size and sales points, without competition. As noted above, competition is what’s hurt the rest of the cannabis industry of late.
There’s a second aspect any potential investor should know about MedMen’s early footprint. Its operational size – in terms of total number of stores and the geographical spread of them – gives it access to data… reams and reams of it.
If you think early data about the birth of this huge industry isn’t worth much, you haven’t been paying attention. Data is the name of the game everywhere… from online search data to store purchases for the likes of Target and Walmart. For cannabis, this is a next-level advantage.
Not only will competitors want what MedMen has, producers, marketers and even government regulatory agencies will. This is an intangible asset that can’t be explicitly price tagged. But it’s huge… and only MedMen has it.
Finally, there’s another reason this early footprint could be the difference between a mediocre investment and a once-in-a-lifetime one. Those above-mentioned limited retail licenses all come with specific zoning and community restrictions.
Not too close to schools or churches. Not too many in one area. You know the kind of city-level planning and regulation we’re talking about. MedMen was able to stake out all the spots to fit with these regulations before anyone else.
This could be just as lucrative as a real estate play as a cannabis one. It’s like knowing which large tracks of land upon which someone is going to build a highway… and buying it up before the public knows.
With the likely route to a full nationwide legalization of marijuana in the U.S. running through regulatory boards, Congress and compromise, getting in first and securing the prime spots might be even more important than it is now with individual states and cities running the show.
The upside is enormous here, just for its first-to-market position in the industry. But its overall business is just as lucrative.
Already, this relatively young company has already seen sales boom. It recorded 22% quarter over quarter sales growth in its most recent period, and high gross margins. So, it is actually on a much quicker path to profits than nearly anyone else in the industry at large.
Its growth is still feeding into new stores, with an estimated 50 by the end of this year. That’s up from just seven stores two years ago.
But at any moment, it is primed to slow its storefront expansion and let that money trickle through its income statement. That’s exactly what investors are looking for right now. A company that shows a real path to profits.
MedMen has it and so much more…
Action to take: Buy shares of MedMen Enterprises Inc. (OTC:MMNFF) to lock in the retail side of this booming industry.
Let the producers fight it out for another month. By locking in investments in the downstream end of the industry, you’ll find far less competition, greater economic certainty and quicker paths to profits.
And at the end of the day, that’s exactly what other investors are looking for right now in the cannabis market. Here are two for you to get in before those others find them.