Thinking About Pot Stocks in 2020? Read This
Booming industries can still have skeptics. No matter how fast a company’s business is growing, it’s never quite possible to have only bullish sentiment surrounding it.
For instance, when Apple Inc. (NASDAQ:AAPL) was capitalizing on the expanding smart phone industry, there were plenty of AAPL stock bears.
And the bears were right for a while, but not for long, since Apple is now by far the biggest company trading on U.S. stock exchanges.
It was a similar story with Tesla Inc (NASDAQ:TSLA). Even though electric vehicle adoption has only been increasing, TSLA stock has had plenty of short sellers. As we know now, these short sellers ended up paying hefty prices as Tesla stock shot through the roof.
Another industry that people love to hate is cannabis. For a long time, pot was highly illegal—and it still is in many jurisdictions.
But due to the changing regulatory environment, many cannabis companies are now operating in broad daylight.
To put things in perspective, Canada legalized recreational marijuana in October 2018 and legalized cannabis-derivative products one year later. In the U.S., there are currently 33 states with legal medical marijuana and 11 states with legal recreational marijuana.
Of course, compared to other industries, pot remains a highly regulated business in North America. But that doesn’t prevent companies in the industry from churning out some very impressive growth rates.
Looking around, there are quite a few pot companies that recently delivered triple-digit-percentage year-over-year sales growth.
For instance, Cronos Group Inc (NASDAQ:CRON), a global cannabinoid company headquartered in Canada, generated CA$12.7 million of net revenue in the third quarter of 2019. (Source: “Cronos Group Inc. Announces Third Quarter 2019 Results,” Cronos Group Inc, November 12, 2019.)
That was year-over-year revenue growth of 238%!
Then there’s Cresco Labs Inc (OTCMKTS:CRLBF, CNSX:CL), a vertically integrated multi-state cannabis operator in the United States.
According to Cresco’s latest earnings report, its revenue totaled $36.2 million in the third quarter of 2019, representing a 184% increase year-over-year. (Source: “Cresco Labs Announces Increased Profitability in Third Quarter 2019 With Revenue Growth of 184% Year-Over-Year and 21% Quarter-Over-Quarter,” Cresco Labs Inc, November 26, 2019.)
Moreover, due to the major milestone of pot legalization in Canada, many cannabis companies have literally gone from zero to millions.
Check out Flowr Corp (OTCMKTS:FLWPF, CVE:FLWR), a Canada-based pot company that also has operations in Europe and Australia.
In the third quarter of 2018, Flowr produced 222 kilograms (489 pounds) of pot but didn’t sell any, so it earned no revenue. (Source: “The Flowr Corporation Announces Third Quarter 2019 Results and Provides Corporate Update,” Flowr Corp, November 26, 2019.)
Fast forward one year and the company’s production more than doubled to 447 kilograms (985 pounds) while it earned net revenue of CA$1.3 million.
Another company that went from no revenue to seven figures was Green Organic Dutchman Holdings Ltd (OTCMKTS:TGODF, TSE:TGOD). This Canadian pot company focuses on growing certified organic cannabis for the health and wellness market.
Green Organic Dutchman went from making zero dollars at the top line in the third quarter of 2018 to making CA$2.6 million of revenue in third quarter of 2019. (Source: “Unaudited Interim Condensed Consolidated Financial Statements,” Green Organic Dutchman Holdings Ltd, last accessed January 21, 2020.)
This Could Leave Pot Stock Bears Speechless
As I said earlier, fast-growing industries can still be filled with skeptics. And to be honest, some of the points brought up by pot stock bears, such as black-market competition and inventory build-up, are valid concerns.
However, there is one thing that could bring a lot more investor enthusiasm to the cannabis industry in 2020: profitability.
You see, legal cannabis is still considered a nascent industry. And that means companies—large and small—are doing everything they can to expand their business, with the goal of capturing meaningful market share.
During this process, the main focus is usually sales growth. Indeed, the top-line growth rates from the industry have been nothing short of impressive.
But this also means that, in many cases, profitability wasn’t really the top priority. In fact, it’s not uncommon to see a pot company post solid sales growth while incurring a wider loss at the same time.
Long-term investors probably wouldn’t want to put their money in a business that’s losing money all the time.
Moreover, since we’re talking about a relatively new industry, it’s yet to be seen which companies will be the winners in the long run.
And that’s why many investors have been standing on the sidelines when it comes to pot stocks.
The good news, is, even though many weed stocks are essentially still start-ups, some have already been reporting positive bottom-line numbers.
For example, Cronos Group Inc—a company that I used earlier to illustrate the marijuana industry’s sales growth—delivered net income of CA$787,996. (Source: Cronos Group Inc, November 12, 2019, op. cit.)
Mind you, CRON isn’t even the most exciting ticker; there are several pot companies showing signs of substantial and recurring profits in their most recent quarters.
According to our Profit Confidential analysts, we could see a lot more cannabis companies reporting sustainable positive net income in 2020.
At the end of the day, as is the case with any fast-changing industry, volatility could continue to be a theme for pot stocks.
But when the industry starts to show positive earnings with strong top-line growth, it just might be enough to deliver a blunt reality check to pot stock bears.