If you think the marijuana industry is growing quickly now, then you haven't seen anything yet. On June 19, our neighbor to the north passed the Cannabis Act, paving a path to become the first industrialized country in the world to legalize recreational marijuana. In 22 days, it'll become a reality, with adults being able to buy recreational weed at licensed dispensaries.
When legalized, Wall Street believes legal pot could wind up generating upwards of $5 billion a year in added annual revenue for marijuana stocks. This is a big reason why we've witnessed three- and four-digit percentage moves higher in most marijuana stocks since the beginning of 2016.
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A U.S.-based pot stock with 171% full-year sales growth? You bet!
Whereas most of the focus has been on direct cannabis players -- i.e., companies that directly come into contact with the plant, such as growers, processors, distributors, and retailers -- it's the ancillary marijuana industry that could hold the key to substantial gains moving forward. One such company, which is U.S.-based, might I add, that has the potential to really turn heads going forward is KushCo Holdings (KSHB) (formerly Kush Bottles).
Last week, KushCo announced its preliminary sales results from fiscal 2018. Though still subject to change while undergoing auditing, the company's press release notes the expectation that it generated $51 million in sales for the year. That's a 171% increase from the prior-year period, and it comes on the heels of a 129% year-over-year sales increase in fiscal 2017 from 2016. KushCo has completely transformed its business over the past year to put itself at the center of three rapidly growing trends in the cannabis industry. Or, in layman's terms, its 171% sales growth could be just the tip of the iceberg.
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Three ways KushCo Holdings can gobble up ancillary market share
To begin with, KushCo continues to focus on its bread-and-butter business of providing packaging solutions to the cannabis industry. A few months ago, Health Canada came out with a very strict set of regulations that growers and retailers will need to follow in order to get product on store shelves. Aside from the obvious, such as the packaging being tamper- and child-resistant, brand names and logos will be limited in size, fonts have to be standardized, THC and CBD content must be noted on the packaging, and health warning labels in yellow must be present. KushCo Holdings should become a go-to source for packaging materials for Canadian growers, as well as cannabis companies around the globe.
Secondly, but building on the first point, KushCo completed the acquisition of Zack Darling Creative Associates and its subsidiary, The Hybrid Creative, to offer branding, marketing, and e-commerce solutions, including web application development, to the marijuana industry. Think about it this way: there will be potentially hundreds of products fighting for shelf space and eyeballs, with little presumed differentiation. KushCo could become one of the names responsible for helping these growers find their identity such that their products stand out.
And thirdly, KushCo's acquisition of Summit Innovations earlier this year makes it a key player in the hydrocarbon gas and solvent space. Hydrocarbon gases are needed in the production of cannabis oils, which are a popular, high-margin alternative form of consumption for medical patients. Meanwhile, solvents are used in the production of cannabis concentrates, which won't be legal come Oct. 17, but should have a chance at becoming legal sometime next year, assuming Canada's Parliament discusses new forms of consumption and votes to approve them.
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The only major concern for KushCo shareholders
With a number of niche operations up and down the cannabis supply chain, KushCo looks as if it's well positioned to take advantage of Canadian legalization. Yet, there's still an important metric that'll probably be missing, at least in the interim: profits.
KushCo Holdings' management team has been busy setting the company up for success in marketing, packaging, branding, and through hydrocarbon gas and solvent production. These acquisitions, and the infrastructure needed to build its ancillary market share, won't come cheaply. Expanding its presence is likely to result in substantial expenses and, more than likely, full-year losses in 2019 and perhaps 2020.
Furthermore, with the company probably reinvesting every drop out positive operating cash flow (assuming it has positive operating cash flow in the coming quarters) back into the business, it may become necessary for KushCo to issue stock in order to raise capital. Share-based dilution is a net-negative for investors since it can weigh on a company's share price, as well as make it more difficult for a publicly traded company to produce a meaningful per-share profit.
Nevertheless, I'm intrigued by the way KushCo has positioned itself to take advantage of the green rush, and I would encourage investors with a stomach for volatility and an appetite for a high-risk, high-reward investments to keep this company on their radars.
