Evolving Cannabis Market Creates Massive Growth Through Fundamentals
Editorial Feature | Aug 17, 2022
It’s back. And one exciting group of stocks is beating the S&P 500 by more than 8:1.
If you thought the great cannabis stock boom was done and gone, here’s good news.
After the epic shakeout of 2019 and early 2020, cannabis stocks are roaring back.
In the three months leading up to July 27, the North American Marijuana Index has soared 59%.1
That’s five times the gains of the S&P for the same period. But look closely and you’ll see that one group of stocks is doing even better.
While gains of 59% are nothing to sneeze at, this sub-group is blowing everything else out of the water.
In fact, they’re up a whopping 97% in just the past three months2. And they’re still going strong.
To put it in perspective, that’s more than eight times the S&P 500’s returns3.
And the best part is that this new cannabis bull market is just getting started.
You’ve got a second chance to buy into one of the fastest growing markets in history
When you look at the numbers, the growth of the cannabis market is mind-boggling.
In the few short years since legalization, the the market has already rocketed to more than $15 billion.4
But as impressive as that figure is, analysts at the esteemed 203-year old investment bank, Bank of Montreal (NYSE: BMO) are forecasting that the cannabis market will soar to an incredible $194 billion by 20255.
And with the growing pains of the early years behind us now, the industry is taking off all over again.
Which is why professional investors are going all in. Their guidance started picking up in late June:
- On July 10, private equity firm CEO Andrew Laub said, “Now could be the best time to invest in cannabis.”6
- On July 12, investment advisor Alan Brochstein said it’s time for investors “to be bullish on cannabis stocks.”7
- On July 15, market analyst Nigel Frith said, “This could be just the beginning.”8
But before you run out and invest, don’t look for the same old names to lead this time around.
A new kind of cannabis company is taking the lead
A new generation of cannabis companies is rising up to dominate the market.
They are leaner, more efficient, and more focused on the bottom line than the mega-producers that led the 2017 cannabis bull market – and the 2018 crash.
They are avoiding the mistakes of the early-market companies by taking their time and making a detailed analysis of both the companies that made it and those that didn’t.
Early companies expanded too much too fast. They overburdened themselves with ridiculously expensive grow operations. Then they were blindsided by falling wholesale prices that decimated profit margins.
Fast-growing under-the-radar producer looks unstoppable
An ambitious new generation producer has emerged with some of the brightest prospects in the industry because they are successfully avoiding those mistakes.
More than any other company, this producer has a strategy designed to ensure maximum profitability and dominant market position.
They are following the fundamental laws of business success: Top quality product with the highest profit margins made at the lowest possible cost:
- LOW PRODUCTION COSTS It is essential to cut every last ounce of fat off production costs, from plant to processing to product. While it used to be common for industry leaders to see all-in production costs of $396 per pound of dried flower, this company is shaving that number down as low as $100 per pound or even less.9
- CONSISTANT HIGH QUALITY There is no real trick to producing low-cost cannabis. But producing high quality cannabis at a low cost requires skill and meticulous attention to detail that many producers haven’t been able to achieve. By focusing less on the raw plant material and more on the best extraction technology and methods, they are able to produce cannabis oil that is as high quality and high potency as the most expensive products on the market.
- VALUE-ADDED PRODUCTS Cannabis is one of the most profitable crops in the world. But smart companies know that cannabis oils and edibles are even more profitable. That’s why the foundation of their business is in producing low-cost, top-quality cannabis oils, which command average margins of 84%, and expansion into edibles, with margins that average a whopping 92%.10
Cut production costs. And then cut them again.
Our top cannabis pick for 2020 has cut costs so low that they are now producing flower at just 6% of the latest reported cost from market leaders.11
Big-name mega-cap are struggling to reframe their business models after disastrous losses.
That’s how the last cannabis bull market ended.
High-flying companies that saw their valuations soar to billions of dollars failed to live up to investor expectations.
Those early companies were all focused on cannabis production – growing the plant and processing it into dried flower.
To ensure the highest quality product, they built high-tech indoor grow facilities equipped with everything from sensitive temperature control technology to automatic feeding systems.
The result was production costs as high as $6.83 per gram.12
As investors poured more and more money into cannabis companies, they used all that new-found cash to expand growing capacity as far and as fast as they could.
Then, as that capacity came online, and more and more producers entered the industry, overcapacity became a problem.
Prices plunged. Marijuana became a commodity, no different than wheat or corn. And those billion-dollar cannabis companies saw their margins shrink to next to nothing.
They were stuck with grossly expensive production facilities in a market that now competes primarily on price.
Achieving one of industry’s highest profit margins
Meanwhile, instead of the business-killing $6.18 per gram that is the industry average, this little-known company is producing at a cost of merely 25 cents per gram.13
Adding the $1.00 per gram cost of excise taxes, and estimating the wholesale price of cannabis at around $6.00 per gram, that gives them an impressive profit margin of 95%, arguably among the highest in the entire industry.
And that’s just on simple dried flower. What they’re doing to convert dried flower into value-added product sends profit margins into the stratosphere.
Year one revenue as high as $6.24 million in 2020 and up to $25.15 in 2021-22
The first crop is in, harvested in August 2020.
Now it is drying before undergoing extraction to oil extract.
As a simple speculation, even selling the extract the fastest and easiest way possible, into the wholesale market, this company could be looking at potential revenue from the current harvest of $6.24 million.
And that is not taking into account the product’s superior quality, but instead using only the average industry standards to estimate yield, costs and wholesale prices.14
The company also controls an additional 100 acres that will be planted and and harvested in 2021-22.
With 133 acres under cultivation, they could potentially see 2021-22 revenue shoot as high as $25.15 million – with some of the industry’s highest profit margins.
As we get closer to when the product becomes available for sale, and as sales start accumulating, news will get out.
That’s the kind of news that savvy investors watch for.
It’s still early in the new cannabis bull market. The research firm ArcView estimates a compound annual growth rate of 47% over the next 10 years.15
But don’t count on companies that dominated cannabis’s first wave of growth to continue their domination.
Instead, look to innovative new companies to dominate the second wave of growth. Companies with top quality products with high profit margins, made at the lowest production cost.
Due to the time-sensitive nature of these growing industries, this is an opportunity to dig into without delay.
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3S&P up 11.54% May 1 – July 27
14Bud yield per acre = 575 lbs https://www.rand.org/content/dam/rand/pubs/working_papers/2010/RAND_WR764.pdf; 220 grams bud = 1 oz oil https://www.quora.com/How-much-cannabis-does-it-take-to-make-an-ounce-of-cannabis-oil; wholesale oil price $163.32/oz https://bulksupplycbd.com/
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