Adding to the Marijuana Bounce Portfolio – Top 20 for 2020.
We’ll just pass along a report from Falcon Strategic Research and let you take it from there. Originally published September 20, 2019 @ $0.24
CLS Holdings Reports Blowout YOY Comparisons – Best Of Breed Cannabis Play (SeekingAlpha)
- $14 million run rate on sales.
- 50%+ gross margins.
- $140 million in projected sales in 2020.
- Undervalued – trading2X sales with industry average 17X sales.
CLS Holdings (OTCQB:CLSH) just announced record August sales and reported MONTHLY revenue of $1.16 million which is an annualized run rate of $13.92 million. The stock has a $26 million market cap which means that this company which has dispensary margins of 50.42% is trading at a 2X sales. That’s right I just said 2X sales when the average multiple is 17X in the industry. Based on these numbers profitability is just around the corner. Canaccord Genuity is following the company a projected $59.1 million in revenue in 2019 and $19.3 million in EBITDA. The 2020 Estimate is $147.7 million with $58.8 million in EBITDA. Again stressing the current $26 million market cap this is the only low risk cannabis stock in the sector. They will be making in earnings over the next year nearly the equivalent in market cap. They put up 50% year over year growth rates. In a sector that looks like its bottoming this stock is the safest spot to be.
Downtrodden Cannabis Sector Showing Signs of Life
The cannabis sector has been very volatile driven in part by the regulators. We need to dissect what happened over the past year to really understand what is happening. At the height of the cannabis market last summer Constellation Brands (STZ) invested $4.0 billion in an equity offering of Canopy Growth (OTC:CGC). It seemed like the good times would never end and then people got excited about Canadian legalization in October 2018. That was a bubble that pretty much burst when people couldn’t get product. There was a sharp downturn in cannabis stocks after Canadian legalization. After the passage of the Farm Bill on December 20, 2018 the index started coming back but it tapered off in April 2019. The slow grind lower in the index just demonstrates a rethinking of the cannabis sector. Some cannabis stocks have gotten beaten down too low as is the case with CLSH because they have earning coming. The upturn seems to be led by earnings driven stocks.
Big Money Stocks
Some of the large cannabis stocks backed by conglomerates seem uninterested in profitability and more interested in making sure their strategic needs are being met. Cronos (OTC:CRON) a Canadian marijuana producer received a $1.8 billion investment from Altria Group (MO) which is one of the largest tobacco companies in North America. Altria also has a large stake in brewing giant Anheuser-Busch InBev (BUD). In total Altria has a 45% stake in CRON and has the option to increase the stake to 55% for an additional $1.06 billion. Even more interesting is that Altria has a chairman and 2 board seats at BUD and the board of CRON is controlled by Altria.
The investments don’t stop there, because BUD also has a research partnership with Tilray (TLRY). Molson Coors Brewing Company (TAP), competitor to BUD, has a joint venture with The Hydropothecary Corporation for a non-alcoholic cannabis infused beverage.
Massive Multiple Contraction
Many still see huge opportunity in cannabis but the industry itself has gone through a massive correction in its price to sales multiples in just the past 6 months. This means investors are not as ready to pay for sales as they once were. Leading in the contraction are the top players like CGC, TLRY, and CuraLeaf (OTCPK:CURLF) which nearly halved their multiples. The biggest standout was CRON which went from 255 down to 19. This multiple contraction means that investors will need to see increasing revenue growth quarter over quarter to sustain the stock prices of these companies.
Characteristics of Best of Breed
- Compounding Sales Growth
- Smoothly Completing Mergers & Acquisitions
- Vertical Integration
- Scalable Operations & Profitability
CLS Sciences (OTCQB:CLSH) is one company that stands out from the pack and has been flying under the radar. This is a best of breed stock that combines all of the best attributes of cannabis stocks into one company. They have a strong medical marijuana franchise in both Massachusetts and Nevada. With the advent of retail legalization they are at an inflection point where sales growth is going to compound higher. This management team has also fully aggregated one acquisition know as Oasis Cannabis. This is the top dispensary in Las Vegas and one glance at the interior retail space will tell the story with its clean professional look. The management team has shown their skill at acquisitions and has another one in the pipeline to hit in Q1 2020. The next Brockton Acquisition called In Good Health is unique, because the total purchase price is $50 million in cash notes and equity, but they are getting a company that has the potential to throw off $20 million in EBITDA the first year assuming modest growth. Getting a marijuana company for 2.5X profits is unheard of when the average price to sales is 17X. They also have a decent balance sheet with $10 million in the bank and the past quarterly reports have showed a positive trend that looks like they are turning the corner to profitability. They also have plans to grow their operations capacity and have a retail brand known as City Trees which is a specially formulated THC distillate used in vape products, tinctures, and caplets. This product is gaining traction in the market and is distributed in 47 dispensaries. They are vertically integrated and in every way a seed to shelf company. This means there are so many chances for cross promotion, which eventually finds its way to the bottom line.
The cannabis sector clearly looks like it has put in a double bottom on a technical basis so now seems like the most opportune time to step into the sector and buy value. The next stage of growth could very well be mergers and acquisitions, but it’s unlikely that the top brands backed by conglomerates will be creating mega brands. Those businesses like TLRY, CRON, and CGC will start to work when these large brands start selling and launching CBD or THC infused products. Mergers an acquisition plays are going to happen in the space and represent big upside for investors. The sweet spot in the sectors seems to be a company that can successfully complete acquisitions at fantastic valuations while increasing their revenues and profitability all at once. CLHS is a best of breed stock with all the characteristics an investor is looking for including a great price. By all metrics the stock is extremely undervalued and ready to run. After the acquisition in 2020 revenues are expected to be $50 million. Using a modest multiple of 5X sales puts a one year price target of $2.00 share. With so much upside potential and very little downside risk it makes sense to go with the best of breed.
Disclosure: I am/we are long CLSH.