The marijuana market in the United States may finally see some momentum.
In a statement last week, President Trump indicated his likelihood of supporting protection for states with legal marijuana markets from federal government intervention by way of a bipartisan bill. The president’s statement was in line with Senator Cory Gardner’s (R-Colo.) announcement back in April of Trump agreeing to lend his support to finding a legislative solution to the federal/state divide on marijuana laws.
The market for U.S. marijuana stocks, however, has been projected on the verge of substantial growth prior to the president’s comments on support.
Analysts project that the market for marijuana in the U.S. could grow to more than three times its value of last year, reaching $22 billion in four years. Scotts Miracle-Gro (NYSE: SMG) has been one of the contenders projected to benefit most from this wave of growth. Yet there may be another top contender among U.S. cannabis stocks: the ancillary marijuana company, Kush Bottles (NASDAQOTH:KSHB).
Kush Bottles’ position as an ancillary cannabis stock gives the company a unique advantage over many other industry players.
While Kush Bottles, whose business revolves around providing growers and cannabis dispensaries with packaging and supplies, is considered a marijuana stock, the company doesn’t directly deal with marijuana. Because of this, Kush Bottles can attain access to capital that is not available to most companies in the industry.
Kush Bottles has been around since 2010, and as such, has been able to keep up with the rapid growth of the industry, particularly as marijuana is legalized in more states. The company’s sales have reflected this growth, with a customer base greater than 5,000 – an increase of 1,000 from the previous year. Plus, Kush’s year-over-year revenue has increased no less than 249% in each of their recent three quarters.
The good news for U.S. marijuana stocks, and Kush Bottles specifically, is that the expansion of the cannabis industry in the states has only just begun.
The company is based in California, with a large recreational market that is projected to have significant growth moving forward. But Kush has also established itself in new states – Nevada and Massachusetts recently – whose recreational markets are in the beginning stages.
More and more, states are taking an interest in legalizing marijuana for recreational use. Later in the year, Michigan will vote on measure that will determine if the state allows a legal recreational market. In the near future, we could see New York and New Jersey taking the same action.
As a marijuana stock to invest in, Kush Bottles is strategically capitalizing on industry trends.
The company has been expanding its supportive ancillary businesses, adjacent to the marijuana industry. Last month, the company acquired a hydrocarbon gas distributor, Summit Innovations, whose gases are used in the process of converting marijuana plants into oils.
Now that Canada is on the verge of opening a legal recreational market, Kush has its eyes on opportunities north of the border. Whereas Canada’s long-time medical marijuana market didn’t provide the company with many opportunities, the recreational market could change that.
And Kush doesn’t appear to be confined to the marijuana sector. The company recently added a new division that will serve the veterinary and pharmaceutical industries with packaging solutions.
Kush Bottles’ expansion beyond cannabis stocks, providing packaging solutions to more traditional industries, may be a wise move.
While the news of the federal government potentially laying off of intervention in the affairs of states with legal markets is good for most of the industry, it may not be good news for Kush. The company’s niche in the U.S. cannabis industry has grown largely out of their willingness to go where other companies were too cautious to tread – a strategy that, so far, has played out to their advantage.
But with the potential de-stigmatization of the cannabis industry in the U.S., should the federal government change its laws, the market doors could open a flood of competitors, perhaps as well-funded or even more so than Kush. Up to this point, Kush has largely had the market to itself.
The company, in the meantime, will try to build a moat around its manufacturing of packaging solutions; however, pulling this off sustainably and over the long-haul is no easy task. Kush is currently trying to establish intellectual property rights for a number of its products, whose launches are pending provisional patents, all of which have been filed. This could help hold off competitors for awhile, but will not prevent those competitors from brainstorming their own creative solutions.
The company still has the advantage of being first in the U.S. industry, having already built steady relationships with cannabis growers and dispensaries. This may afford Kush a sufficient head start over its competition, even as the U.S. market expands.
Investors looking for great pot stocks should consider a few things before buying into Kush Bottles.
In the past year, Kush Bottles’ shares have soared above 150%, making them big winners. The ride, however, has been a somewhat volatile one at times. In recent news, the company’s stock fell almost 20% following an announcement of a stock offering of $36 million and the dilution of shares that follows such a move.
The company’s rapid growth has also come at a bit of a cost, making its stock somewhat pricey. Currently, Kush shares trade at 11 times the sale price. And metrics that involve an earnings-based valuation don’t work for Kush, seeing as the company’s Q2 loss was $920,000, canceling out the profits earned in the three quarters prior.
In spite of all this, though, the company seems to be in a good financial position. The critical second quarter loss largely stemmed from depreciation expenses and compensation from non-cash stock. As of the end of February, Kush reported having cash exceeding $7 million and debt of only $1.2 million. Should their revenue continue its upward trajectory, the company’s valuation ought to improve along with it, placing it among the top pot stocks to keep an eye on in the ancillary market.
(For more on the ancillary market, read This Could Be the Next Big Hit for Marijuana Stocks)