To say that things have been interesting on Wall Street over the past three and a half weeks would be an understatement.
Following a year of historic volatility, 2021 is attempting to one-up its predecessor, with retail investors to blame. The recent battle between retail investors on the Reddit-based WallStreetBets forum and institutional money managers in heavily shorted stocks and/or companies with penny stock-level share prices has whipsawed more than a dozen momentum stocks.
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Sundial Growers and Zomedica are on fire, but they'll likely implode
As of last week, Canadian marijuana stock Sundial Growers (SNDL 10.11%) and clinical-stage veterinary drug and device company Zomedica (ZOM 0.92%) were arguably the two hottest stocks on Wall Street. Over the trailing month, shares of Sundial and Zomedica are up a respective 184% and 175%. For context, the benchmark S&P 500 has gained 3.6% in the same span.
Though Sundial and Zomedica have seen a rise in short interest of late, their penny stock share price (i.e., under $5) looks to be the reason retail investors have flocked to these stocks. Unfortunately, both companies offer very little from a fundamental perspective, which makes their big gains highly suspect.
Sundial Growers has undertaken a number of share issuances and debt-to-equity swaps since the end of September, resulting in an increase of over 1 billion outstanding shares. Aside from its highly dilutive activity, Sundial is in the midst of a business transition from the wholesale side of the cannabis business to retail. This shift won't happen overnight, and it promises to yield ongoing operating losses in the meantime.
Meanwhile, Zomedica is readying to launch its point-of-care Truforma diagnostic system for cats and dogs on March 30. That's great news. However, it's not going to rocket out of the gate like pharmaceutical products are known to do. Wall Street isn't expecting Zomedica to top $20 million in sales until 2023. That's a bit unnerving for a company sporting a nearly $2.2 billion valuation.
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These are the unstoppable stocks you should be buying
My suggestion is simple: Forget penny stocks like Sundial and Zomedica and buy unstoppable stocks that offer tangible and sustainable growth. The following three companies perfectly fit the bill.
First up is a company that I imagine most readers are going to be familiar with: Facebook (META 2.98%). Although the company has taken heat for the way it's monitored hate speech on its platform, it remains the most dominant force in the social media space.
Late last month, Facebook lifted the hood on its full-year results for 2020. In one of the most challenging years in decades for the U.S. and global economy, the company generated 21% ad revenue growth and finished with 2.8 billion monthly active users to its namesake website. If you include Facebook's other owned assets (WhatsApp and Instagram), its monthly active user count grew to 3.3 billion. These are insane figures that demonstrate the breadth of the platforms' popularity and make it the clear go-to for advertisers looking to reach a broad or highly targeted audience.
What I've long said about Facebook that makes it such a growth rock-star is that it's still not fully monetizing its assets. The $84.2 billion in ad revenue generated in 2020 was almost entirely derived from Facebook and Instagram. Both WhatsApp and Facebook Messenger have yet to be significantly monetized. When the company does open the floodgates on these platforms, Facebook can expect an absolute surge in its operating cash flow.
With four of the six most-visited social destinations, Facebook has an absolute stranglehold on the social media space. That makes it a growth powerhouse that investors are going to want to own.
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Cresco Labs
If you really want to put your money to work in the high-growth cannabis industry, U.S. multi-state operator Cresco Labs (CRLBF 1.51%), not Sundial Growers, is your path to riches.
One realization that pot stocks investors need to come to terms with is that the U.S. marijuana market is many, many times larger than the Canadian pot industry. Until such time as we see cannabis legalized at the federal level in the U.S., Canadian marijuana stocks will remain a risky venture. That's why focusing on U.S. weed stocks like Cresco Labs can be such a smart move.
Cresco Labs brings a two-pronged growth plan to the table. First, like other multi-state operators, it has a burgeoning retail presence. Currently, it has 10 of its 20 operating locations in Illinois, which is a limited license state. With the Land of Lincoln limiting the number of retail licenses it'll issue, and hitting $1 billion in sales in its first year following recreational legalization, Cresco has a good shot at securing significant market share.
Second, Cresco is a leading distributor of wholesale pot products in California, the largest marijuana market in the world by annual sales. By acquiring Origin House in January 2020, Cresco was able to get its hands on a lucrative cannabis distribution license in the Golden State. This license has given it access to over 575 dispensaries throughout California -- a figure that should continue to grow over time.
Cresco is expected to decisively turn the corner to profitability this year, and looks to be on track to top $1 billion in annual sales in 2022. That makes it one of the more compelling growth stocks to buy right now.
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Intuitive Surgical
Long-term investors also can't go wrong buying into the leading robotic-assisted surgical system developer, Intuitive Surgical (ISRG 2.21%).
At the end of 2020, Intuitive Surgical had installed just shy of 6,000 of its flagship da Vinci surgical systems into hospitals and surgical centers around the world. That's more systems currently in place than all of its competitors, combined. Being the most dominant player in robotic-assisted surgery for two decades, along with charging $500,000 to $2.5 million per system, makes it highly unlikely that its clients are going to jump ship to a competitor. In other words, when Intuitive Surgical lands a customer, they tend to remain a customer for a very long time.
What makes Intuitive Surgical such a moneymaker is the company's operating model, which is designed to yield higher operating margins over time. In its early years, most of its revenue was generated from selling pricey but low-margin da Vinci systems. Nowadays, the company brings in most of its revenue from selling instruments and accessories with each procedure, as well as servicing its systems. Since these are considerably higher-margin segments, it suggests that the company's operating margin will improve as its installed base of da Vinci systems grows.
Having a virtually insurmountable lead in robotic-assisted surgical share, coupled with the company's ongoing innovation, makes it an unstoppable stock you'll want to add to your portfolio.
This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
