In the grand scheme of things, marijuana stocks have been serious moneymakers over the past three-plus years. Since 2014, global licensed-store cannabis sales have more than tripled, and worldwide growth prospects have allowed pot stocks to soar. In fact, some of the best-known cannabis stocks are up well over 1,000% since the beginning of 2016.
But the past four months haven't been kind to the green rush. Supply issues in Canada, high tax rates in select U.S. markets, and a host of scandals have depressed valuations throughout the industry. This isn't unexpected given that the marijuana industry is still maturing.
However, it is possible that this recent decline in cannabis stocks has yielded intriguing value within the industry. Keeping in mind that all investments in cannabis should be undertaken with a long-term perspective, my top marijuana stock to buy in August isn't a company most folks have on their radars, or have even heard of before. Ladies and gentlemen, I give you small-cap pot stock Planet 13 Holdings (PLNH.F -6.00%).
Image source: Getty Images.
Here's why Planet 13 isn't on the radar for most investors
Planet 13 is a vertically integrated dispensary operator in the United States. "Vertically integrated" is just a fancy term meaning the company controls its growing process from seed to sale, including cultivation farms and processing sites.
The allure of operating in the U.S. is simple: It's the crown jewel of the cannabis world. According investment bank Stifel, the global pot industry could be generating $200 billion in sales in a decade, with the U.S. accounting for half this total. That makes well-known retailers of marijuana in legalized states potentially lucrative investment opportunities.
So why is Planet 13 Holdings just a $268 million company that's seen its stock fall nearly 19% over the trailing three-month period?
For starters, the company isn't making money, which is sort of a theme for most of the cannabis industry. Unfortunately, with Canada having legalized recreational weed, and more than two-thirds of the U.S. now allowing medical cannabis to be prescribed, promises are no longer valid reasons to send marijuana stock valuations into the stratosphere. Wall Street and investors want to see tangible evidence of shrinking net losses or, more preferably, operational profitability.
This is especially true of the U.S. dispensary space, where Trulieve Cannabis, my top marijuana stock to buy in July, is already very profitable and growing sales exceptionally fast in Florida.
Image source: Getty Images.
Another reason Planet 13 doesn't get the time of day is that it's not in a licensing war with its competitors to acquire as many retail, cultivation, and processing licenses as it can. Whereas vertically integrated operators like Harvest Health and Recreation and Curaleaf Holdings have 142 and 131 retail licenses, respectively, on a pro forma basis, you only need two hands to count how many licenses Planet 13 possesses. Just as investors have a hard time realizing there are important metrics beyond production for Canadian growers, they often forget that variables exist beyond license count for U.S. dispensary stocks.
Lastly, there's obvious dilution concerns for a relatively small over-the-counter-listed company like Planet 13. In order to execute on its business strategy, it needs capital, which may include using its own stock as a financing tool, which is common practice with pot stocks. Unfortunately, this tends to hurt existing shareholders.
Four reasons Planet 13 is the cannabis stock you should buy in August
Now that you have the full story of why Planet 13's stock hasn't rocketed into the stratosphere, let me explain why I believe it might over time.
To begin with, Planet 13 isn't your typical dispensary operator. Rather, it wants to become the Disneyland of cannabis stores -- and you don't see Disneyland cheapening itself by putting in 100-plus theme parks across the United States. The company's SuperStore, just off the Strip in Las Vegas, will span 112,000 square feet upon completion, which is a touch larger than the average Walmart. In other words, Planet 13 is building a consumer experience within its stores and making itself into a must-see destination, which no other major dispensary operator can claim.
The Planet 13 SuperStore in Las Vegas. Image source: Planet 13.
As someone who's visited the SuperStore, the second thing that really stands out to me is the company's focus on promoting higher-margin product and using technology to enhance the shopping experience. There are a number of self-service-type kiosks throughout the store, should you not want your own personal budtender. And while these kiosks still require a budtender to bring you your product, it looks to be considerably faster than waiting in line to buy product. With lower-margin dried flower located in the back of the store, and high-margin derivatives toward the front of the store and by the checkout line, Planet 13 is perfectly set up to capitalize on a favorable product mix.
Third, Planet 13 is in all the right markets so far. Nevada may not be a populous state, but according to the State of the Legal Cannabis Markets report from Arcview Market Research and BDS Analytics, the Silver State is set to lead the country in cannabis spending per capita, with tourism to thank. Planet 13 also recently announced that it would launch a 40,000-square-foot dispensary in Santa Ana, California, just a short drive from the actual Disneyland. California is the largest legal-weed state, by annual sales.
Image source: Getty Images.
Lastly, we're seeing the results of Planet 13's hard work paying off, even though the company isn't yet profitable. Having only opened its SuperStore at the beginning of November 2018, its average paying customer count per day has jumped by nearly 50% to more than 2,000, with the average ticket price rising by roughly $10. The average daily visitor count has also nearly doubled to about 3,400. This all led to a 19.4% sales increase for the SuperStore in the second quarter, relative to the sequential first quarter.
And the SuperStore isn't even complete. During the second half of 2019, the addition of a pizzeria, coffee shop, events center, and consumer-facing processing center will only add to the shopping experience.
With Wall Street looking for $106 million in 2020 sales (that's less than a multiple of three times next year's revenue), and the company valued at less than 20 times next year's earnings per share, Planet 13 is my top marijuana stock to buy in August.
