As cannabis stocks speed through the hyper-growth “Scale” phase, those that do it the right way will make a fortune.
Last year, 263 million people consumed marijuana around the world.
If you think about that as the population of a country, and only the United States, India, and China would have more people.
Combined, those 263 million people spent $344 billion on pot.
Now, only about $20 billion of those sales were legal, and most of those sales occurred in the U.S. But overcoming the massive gap between illegal and legal global sales is precisely why there’s so much opportunity for cannabis companies right now.
In five years, total marijuana sales could easily grow to $400 billion, and by then most of those sales will be legal. And that doesn’t even count CBD sales. Neither does it count the sales of pick-and-shovel companies serving the industry, nor the growth of entirely new markets – like cannabinoid-based pharmaceuticals.
With all that, we’re looking at growth well north of 80% per year for the cannabis industry – and that’s just on average. The right cannabis companies with the best assets could individually grow much faster.
That’s why scaling a company up to handle this rocketing legal demand is so crucial during this new phase of rapid cannabis industry growth.
But, when it comes to getting scale, there’s a right way and a wrong way.
And, to make a fortune buying stocks in a market with so much ground to cover so quickly, you want to be able to spot the difference…
Caring About Your Capital
At the end of the day, a company scaling the right way cares about your capital.
This capital is represented by the stock you own. And, though most treat it well, a few treat it poorly.
Treating stock well is so important that when my analysts and I rate a cannabis company for our NICILytics database, how well it treats its shareholders is a major consideration. In fact, almost all of the companies with a 1 rating – and many of those rated 2 – scored so low because they show almost no regard for their stock or stockholders.
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It should come as no surprise that these stocks have also massively underperformed the cannabis market, while we have seen incredible returns from our shareholder-loving 4s and 5s over the last six short months.
The Right Way to Issue Stock
Stock is the best thing for cannabis companies to spend because it’s the cheapest form of capital available to them right now. For most, debt is still expensive and cash is king.
It’s because debt is so expensive and hard to get that Innovative Industrial Properties (NYSE: IIPR) can step in and make so much money where banks fear to tread. Even for companies like Canopy Growth Corp. (NYSE: CGC) with mountains of cash, issuing stock is cheaper.
And the first thing to understand is that whether a company uses its stock to buy another company, a brand, or retaining key management, it is acquiring assets. Those assets are expected to generate income and a company’s stock is a shareholder’s claim on both those assets and the income they create.
The faster the income from those assets grows, the higher the stock price climbs.
Now, whether a company is issuing its stock wisely depends how fast it can make the income grow from the assets it acquires. Buy assets that produce income growing at a lower rate than their existing assets, and they are diluting the company’s earnings. This usually results in a declining stock price. Buy assets that throw off income growing at the same or higher rate than existing assets, and the stock price rises.
And since legal sales will outpace illegal sales in just a few short years, cannabis companies that get to scale will see their incomes will soar – and so will their stock prices.
And it is the knowledge of this incredible growth that makes some cannabis company’s stock cheaper to issue than debt or spending cash.
Shareholder-loving executives issue stock to buy complementary assets, retain or bring on valuable talent, or build up their brand portfolio. After all, these executives are shareholders as well and have a long-term perspective.
Executives issuing stock foolishly usually do it for one of two reasons – greed or desperation.
Issuing Stock the Wrong Way
The greedy issue stock for almost anything. They pay consultants – which can be executives of the company. They cover routine services. They habitually pay off debt with stock. They give themselves bonuses without the corresponding company performance.
You also see them buy assets for the company owned by insiders – like themselves. One U.S. cannabis company popular with the media is so egregious with this practice that we’ve rated it a 2.
The desperate do most of the same things, except for self-dealing, but do them because they have very little cash. The hope is that, by issuing stock to pay for those things that keep the business going, they can keep the wheels on the bus just long enough to make some sales or find a big investor.
The problem is, the stock adds up and dilutes future earnings growth – provided they get there. The desperate aren’t dishonest, but they are also not acquiring income-producing assets. They are simply maintaining the assets they have at the expense of existing shareholders.
Getting to scale is the best way for cannabis companies to grow well in excess of 80% per year through the incredible growth phase we just entered. And finding those stocks that scale the right way is exactly what we give our Cannabis Investor’s Report members.
Also, check out our latest research report, 2019 Is the Year of CBD. CBD sales are set to grow even faster than legal marijuana, and this report walks you through this incredible opportunity to profit.
Executive Director, National Institute for Cannabis Investors
P.S. What former Speaker of the House John Boehner just revealed about the cannabis industry could help you make a FORTUNE from America’s next trillion-dollar industry. If you missed this shocking prediction live, go here for a special rebroadcast.
One response to “Scaling the Right Way Means Massive Cannabis Profits for You”
April 26 2019