Feature 829

It’s Time to get ‘Picky’ with Marijuana Stocks

In a recent Cabot Marijuana Investor, Chief Analyst Tim Lutts had this to say about the pot industry: “The stocks remain cheap by historic measures and the best-run companies in the industry continue to expand at blazing speed. There’s no question that this remains a sector full of high potential—the potential to launch leading consumer brands like Budweiser and Marlboro. The only questions, really, are what stocks to own and when to buy them. However, the strength is not evenly distributed. The Canadian stocks in particular are weak, while the U.S. stocks are strong, and thus the portfolio will now become more U.S.-centric than ever (two years ago it was heavily Canadian).”

Here’s a picture of the ups and downs of marijuana stocks. After a stratospheric climb, they nose-dived last year, but now, the coronavirus pandemic has boosted demand, although that could be a temporary effect. However, the pandemic will undoubtedly ‘weed’ out the fundamentally strong marijuana companies from the weak. And the strong ones will be well-prepared for the next bull run.

In 2017, the Global Marijuana Market was valued at $17.2 billion. It is forecasted to grow at a CAGR of 22.9% from 2019 to reach $88.97 billion by 2025, with North America being the fastest growing market.

As I mentioned, the pandemic has helped. While retail, in general, has been decimated, online ordering for weed has blossomed. After the $2 trillion worth of stimulus checks began flowing, weed sales mid-April soared by 50%.

The industry has some financial problems—myopic profit growth and a lack of cash flow for further expansion after tons of new capacity hit the market in 2018. Some marijuana companies have managed to continue growing due to cash injections from blue chip companies, like Canopy Growth and Cronos Group, who received big investments from Constellation BrandsSTZ and AltriaMO, respectively. But many others burned through their cash by expanding too fast, and now find themselves with a weakened balance sheet.

That’s not the case with our Spotlight Stock, Curaleaf Holdings, Inc. (CURLF). As contributors Ian Wyatt and Ben Shepherd noted, the company has great cash reserves.

And at the end its recently reported first quarter, that cash had risen to $176.4 million. Total revenues came in at $96.5 Million and EBITDA was $20.0 million, with a loss of $0.03 per share. Total revenues were up 28% and EBITDA rose 45%, both sequentially. Retail revenues increased 197%; wholesale revenue rose by 134%; and management fee income was up by 160%.

There’s no guarantee fo an immediate return to a bull market for marijuana stocks, but select companies will continue to do well. And CURLF seems to have all the right stuff to continue accelerating.


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