Picking a winning cannabis stock comes down to these criteria…
The boom in cannabis stocks will be one for the history books.
Never before has an industry emerged with so much pent-up demand. We’re talking $80 billion in unmet spending in the United States alone – four times what the legal industry can currently satisfy.
And the journey towards meeting that demand will drive select cannabis stocks 20X, 30X, even 50X higher over the next couple of years.
With those kinds of gains in store, you buy the right stocks, and even with a modest stake of $500, you could pay for a nice family vacation.
Invest a bit more – say $1,000 to $2,000 – and you’re looking at a new car, or maybe even a kitchen remodel.
Go big, and, retirement just got that much closer.
But you can’t buy stock in any old cannabis company and expect those kinds of life-changing results.
You have to pick your spots.
Otherwise, you will get burned.
CEOs Are Investors Too
The first thing to understand in picking a winning cannabis stock is this: CEOs are investors too, and their investments create capital for the company.
Now, simply stated, capital can be defined as “anything you own that can make you money.”
For example, your stocks are your capital. You own them to make money.
For an independent truck driver, the big rig they paid for is capital that they put to work.
Maybe you own an oil lease or two, or perhaps a few rental properties. These are all forms of capital because you own them to make you money.
Well, a cannabis CEO spends money to acquire or win cannabis licenses in desirable states, to build greenhouses and dispensaries, on marketing to build a brand, on research and development to create new products or processes.
These are all capital investments that a CEO makes to make money for shareholders.
And the first thing you need to do to recognize a winner is to see how much money the CEO spent on those capital investments.
Let’s look at Curaleaf Holdings Inc. (OTC: CURLF).
The graph below adds up all the investment that Joe Lusardi, until recently the company’s CEO, made on behalf of Curaleaf shareholders over the years:
We’ll start from the bottom and work our way up…
The light blue section at the bottom totals Curaleaf’s investments in property, plant, and equipment – Net PP&E. That’s the amount spent on greenhouses, extraction equipment, trucks, cultivation infrastructure, dispensaries, etc. The company’s investment in PP&E adds up to $476 million.
Next comes Intangible Capital. Curaleaf has spent $807 million acquiring patents, performing research and development, and on marketing to build a brand. These are called intangibles because you can’t really touch a patent, hold an advertisement, or kick the tires of research. But when Joe spent money on these things, he expected them to make money for Curaleaf’s shareholders.
The $439 million in the red area is Goodwill, which accounts for the premium paid for the companies that Curaleaf has acquired. That premium is basically the excess that Curaleaf paid for a company above and beyond the value of the acquired company’s capital.
And at the top is $237 million in Working Capital. This includes how much money is tied up in raw materials and finished goods inventories, plus the difference between accounts receivables (payments that Curaleaf is owed) and accounts payables (what Curaleaf owes vendors).
Add them all up, and Curaleaf’s capital base totals nearly $2 billion.
And to entice new shareholders to buy CURLF stock, its executive team needs to get that $2 billion in capital to generate more return than new shareholders could earn in the stock market.
Level of Return
Now, that level of return depends on a lot of things. It includes the cost of borrowing money, the premium that a typical stock earns over time, plus an adjustment for risk.
We get the cost of borrowing money from 30-year treasury rates. These have averaged about 1.5% over the last year, so that forms our base.
To that, we add a premium of 4% for stocks (based on a whole bunch of academic studies, which I don’t want to bore you with). That brings us up to a 5.5% return, but Curaleaf is riskier than the typical stock – so we’re going bump that required total return up to 6% to account for it.
Therefore, Curaleaf must return at least 6% on $2 billion in capital to make share shareholders happy.
That return comes from net operating profits after taxes. For Curaleaf, those profits must exceed $120 million (6% of $2 billion) to deliver more value than new shareholders could otherwise earn in the stock market.
And Curaleaf is close to hitting that mark.
For the 12 months leading up to its last fiscal quarter, Curaleaf generated $74 million in after-tax net operating profits. That’s $45 million shy of that 6% target, which may sound like a lot. But it’s less than 10% of the company’s $472 million in revenue for that same period.
Grow that revenue another 10% while controlling expenses, and Curaleaf is in the green and delivering value for shareholders.
And Curaleaf will definitely grow sales by well over 10%.
The company reports earnings after market close on March 9, so we’ll know for sure next week. But given the revenue growth that Curaleaf and other top multistate operators (MSOs) have experienced, I bet its sales for the year will breeze past $600 million.
By the end of 2021, it’s not hard to see annual sales hitting $1 billion – a 112% surge.
And the combination of massive sales growth and soaring profits will light a rocket under the stock.
I’m talking an easy double from its current $17 price tag.
To dive even deeper into why Curaleaf is so close to delivering incredible value to shareholders, check out my new Deep Dive right here:
Identifying companies with investment-savvy executives is precisely what we do for our NICI Membership subscribers.
But to pick the right spots before the market catches on, I’d encourage you to act today. Otherwise, that vacation or early retirement will have to find another way to pay for itself.
Executive Director, National Institute for Cannabis Investors
13 responses to “How to Pick the Hottest Spots in Cannabis Stocks (Before the Rest of the Market Catches on)”
March 03 2021