Few industries have investors seeing green quite like the marijuana industry. The Horizons Marijuana Life Sciences ETF, the very first tradable cannabis exchange-traded fund, has more than tripled the year-to-date gains of the broad-based S&P 500, which is also having quite the year. Thanks to expectations that Canada will continue to ramp-up sales, Mexico joining Canada as a legalized recreational market later this year, and U.S. cannabis sales continuing to soar, marijuana stock valuations are getting pushed higher.
But as is the case with any industry, even the fast-growing type, there are always laggards. Some of these subpar performers are rightly trailing their peers, with fundamental or corporate governance issues holding them back. Others, however, could be budding bargains. Here are three such marijuana stocks that make for strong buys in June.
The first diamond in the rough that investors should strongly consider buying this month is ancillary player KushCo Holdings (KSHB).
KushCo was clobbered recently after it uncovered accounting errors that caused it to restate its 2018 and 2017 financial results. The "errors" involved the categorization of shared-settled contingent considerations from two separate acquisitions (one in each year), which resulted in these shared-settled contingent considerations being recognized as equity instead of a liability. Once the accounting snafus were corrected, 2017 earnings were lifted by $1.6 million but more than doubled the company's 2018 loss, to $24.3 million.
Accounting errors aren't a good thing, and it speaks to the governance issues that new industries often contend with. On the other hand, however, note that this restatement had absolutely no impact on KushCo's cash on hand, cash flow, or its sales, which are the figures that really matter here. While future acquisitions might merit a more thorough inspection, nothing here from a sales, cash flow, or cash-on-hand perspective looks out of place.
That gets us to KushCo's trio of niche advantages, which is why I truly feel it's worth buying (and why I purchased shares in the company last month). First, there's the company's core packaging and branding business. In order for growers to get product on dispensary-store shelves, growers need to meet a laundry list of packaging regulations. KushCo manufactures these packaging solutions, ensuring that more than 5,000 of its clients remain compliant with federal, state, and/or local laws. It also works with some of its clients on branding and package design to help them stand out in an increasingly crowded field.
Secondly, KushCo is involved in the distribution of vape products, including heating elements. The knock against this sales channel has been that the China trade war would continue to make these vape elements more expensive, since they're imported from China. KushCo had been eating the costs of these price hikes rather than passing them onto its customers, and hurting its margins in the process. However, management recently noted that this will no longer be the case, with tariff costs now being passed onto customers. Given the strong demand for cannabis derivatives, it's unlikely that these higher price points will deter consumers.
Finally, KushCo provides hydrocarbon gasses and solvents, which are respectively used in the making of cannabis oils and concentrates. Again, with derivatives being the go-to for the younger generation of cannabis users, KushCo's hydrocarbon gas and solvent demand should be strong.
Considering that KushCo has already raised its full-year sales outlook once this year, it looks to be a price-to-sales bargain among a sea of pricey pot stocks.
The second marijuana stock that appears to be an outright steal for investors in June is Ontario-based grower CannTrust Holdings (CNTTQ). I should note it's the other pot stock that I opened an initial position in during May.
CannTrust shares declined almost 45% between late March and early May after a series of news events disappointed shareholders. First, the company's fourth-quarter earnings report featured a pretty substantial operating loss, primarily associated with the high costs of boosting its production capacity. Management introduced the idea of acquiring up to 200 acres of land for outdoor growing, ultimately doubling or tripling its peak annual output in the process.
Then, just a few weeks later, CannTrust announced a $200 million (that's U.S.) share offering, of which $170 million was being sold by the company. This was part of a 700 million Canadian dollar shelf offering filed by the company in early March.
CannTrust needs capital to expand its production, and the only fast means of getting that capital is through dilutive share sales. In this case, the more than 30 million share offering for $5.50 per share came at an almost 15% discount to the company's closing price on the day prior to the offering announcement.
As with KushCo's accounting error, there's no way to sweep these bad-news events under the rug without acknowledging that, yes, they're disappointing. But the thing to realize here is CannTrust's operating loss and dilutive share sale are both very near-term events. If the company can hit the vision that management has outlined, it's going to look like an incredible bargain as soon as a year from now.
First, take into consideration that 100,000 kilos of CannTrust's annual output will come from low-cost hydroponic growing methods. Rather than using soil, the flagship Niagara facility is growing marijuana plants in a nutrient-rich water solvent. Thanks to cheap access to water and electricity, as well as moving containerized benches, this 100,000 kilos should come in at or below industry-average per-gram production costs.
Secondly, CannTrust has another 100,000 kilos to 200,000 kilos in potential outdoor grow. While some of this cannabis could wind up hitting dispensaries in the discount or average-cost category, most will likely be used for extraction purposes, allowing CannTrust to develop edibles, infused beverages, topicals, and other high-margin derivative forms of consumption.
And third, don't overlook that CannTrust is one of just four growers in Canada to snag supply deals with all of the country's provinces.
All told, about a year from now, CannTrust should be generating profits once again, which would make its 200,000 kilos to 300,000 kilos in peak annual output for roughly an $800 million market cap an absolute steal.
Charlotte's Web Holdings
The third and final company to consider buying in June is hemp-oil and hemp-derived cannabinoid manufacturer and distributor Charlotte's Web Holdings (CWBHF -0.34%). Although it's the only one of the three pot stocks listed here that I didn't buy in May, make no mistake that I'm getting closer to pulling the trigger and taking a position for the long run.
Since hitting an all-time high in early April, shares of Charlotte's Web have fallen by approximately 40%. Some of this decline had to do with simple profit-taking after shares of the company rallied more than 140% in a matter of four months. However, the bulk of the decline came recently, when a grand total of 8.05 million shares (including the overallotment) were sold by existing shareholders at CA$20 ($14.88) each, which was about 25% lower than where the stock had been trading prior to the sale announcement. Note that Charlotte's Web didn't raise a penny from this share offering.
Although there's no hiding the disappointment that existing shareholders were willing to take a roughly 25% discount just to exit or reduce their positions, nothing within the company's operating results or long-term outlook suggests anything other than success, which makes this pullback something of an opportunity for investors.
Remember that President Trump signed the Farm Bill into law in December. After decades of hemp plants and cannabis plants being indistinguishable by federal law, industrial hemp production and the manufacture and distribution of hemp derivatives is now legal. This allowed Charlotte's Web, the leader in hemp-oil and hemp-derived cannabidiol market share, to push its products into more than 6,000 retail doors as of the end of March, up from 3,680 retail doors as of Dec. 31, 2018. This is really just the tip of the iceberg for Charlotte's Web, which should have little issue securing major national retail accounts from here on out.
In terms of operations, few, if any, cannabis stocks are generating the green quite like Charlotte's Web. The company is already very profitable, and Wall Street is looking for 111% sales growth in 2019 and then another 120% sales growth in 2020. If these estimates prove accurate, the company should have little trouble eclipsing $320 million in annual sales by 2020, and all with a forward P/E of less than 20. That's exceptionally inexpensive, and makes Charlotte's Web an attractive pot stock to consider buying in June.