Returns as of 12/18/2021
Returns as of 12/18/2021
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It is a popular misconception that you need a bucket load of money to enter the investing world. But what if you can invest as low as $500 after paying off all the bills and still get rich over time? And as the saying goes, all good things come to those who wait — a principle that also applies to investing. In an industry that’s still at a nascent stage of growth but racing full steam ahead, like marijuana, the old adage holds true all the more. The cannabis industry is loaded with exciting companies that have been performing tremendously well this year.
While the popular players in the U.S. cannabis space get all the attention, the smaller ones often get sidelined. But these small-cap multi-state operators (MSO) have been growing revenue with a clear path to profitability while keeping their balance sheets stable. Their expansion plans also look promising. Two such names are Florida-based Jushi Holdings (OTC:JUSHF), and New York-based Columbia Care (OTC:CCHWF). Investors may be skeptical to invest in these small-cap stocks, but let’s take a look at why the right time to buy these dirt-cheap stocks is now.
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With a market capitalization of nearly $700 million and just 26 stores, Jushi is setting itself up for a bright future. In its third quarter (Q3) that ended Sep. 30, total revenue surged 117% from the year-ago period to $54 million. According to management, the three key markets of Pennsylvania, Virginia, and Illinois contributed to this growth.
Jushi follows the strategy of targeting limited-license markets. This means that some states restrict the number of licenses they offer (since cannabis is federally illegal), thereby reducing competition. And Jushi has come a long way, with a total of 26 stores now, from 13 stores at the beginning of 2021. Financially, that has translated into Jushi recording a 125% year-over-year increase in adjusted EBITDA to $6.4 million.
Jushi currently holds 36 retail licenses in five state markets. The company is employing a smart strategy by attempting to strengthen its hold in the medical segment in states where recreational markets could soon begin. It opened its second store in Virginia after Q3. The state recently legalized recreational cannabis, and its market should open up in 2024. It also has 16 stores in Pennsylvania now, where developments are ongoing to legalize recreational cannabis. Jushi also entered a deal to acquire a Nevada-based vertically integrated cannabis operator for $62.5 million to expand its base in the state. The deal adds three retail stores, one cultivation facility, and a product manufacturing facility to Jushi’s total holdings.
The company expects to open another four dispensaries in the remainder of the year. Due to delays in store openings in a few states and some other external headwinds, management revised their full-year guidance. Jushi now expects full-year revenue to come in the range of $205 million to $215 million and 2021 adjusted EBITDA to come in the range of $21 million to $25 million.
While focusing on revenue and profits, Jushi has also maintained a stable balance sheet. As of Oct. 31, it had $94 million in cash and short-term investments and $142 million in principal amount of total debt (excluding current leases and financing obligations related to plants and equipment).
Columbia Care also uses the same strategy as Jushi of targeting limited-licensed cannabis markets. This strategy brought in another quarter of outstanding revenue surge from this pot grower. In its third quarter, total revenue jumped 144% year over year to $132 million. The revenue growth drove in another quarter of adjusted EBITDA to $31 million, a whopping 634% jump from Q3 2020. The company accredited this success to key cannabis markets of California, Colorado, Massachusetts, Ohio, Pennsylvania, Illinois, Maryland, and Virginia.
The company is also strengthening its position in Virginia. It opened its third dispensary in the state this month and plans to open two more by year’s end, bringing its total ultimately to 12 in the state. That’s an impressive number of stores for a pot company to hold in the state before the recreational market heats up. It also has 147,765 square feet of cultivation and production space across the state.
Columbia Care even has a stronghold in the cannabis markets of New York and New Jersey, where its revenue grew 4% and 45% sequentially in the third quarter. It operates two stores in New Jersey and four in New York. Both states recently legalized recreational cannabis. Currently, Columbia Care has 99 dispensaries nationally.
Despite being just a $1.1 million market cap company, Columbia Care has managed to grow its gross profit margins from 39% in the year-ago period to 49% in Q3.
Even though the company isn’t profitable yet, its drastic growth in revenue, EBITDA, and aggressive expansion plans lead me to believe it will soon be profitable.
Projecting the same headwinds as Jushi, Columbia Care’s management also revised the company’s 2021 guidance. It now expects revenue to come in the range of $470 million to $485 million, adjusted EBITDA to be in the range of $85 to $95 million, and adjusted gross profit margin to be around 46% for the year.
Analysts see upsides of 65% and 193% for Jushi Holdings and Columbia Care’s stock over the next 12 months, which I think is possible.
Even though both are excellent cannabis stocks to invest in right now, because of their smaller size, investors may be skeptical about taking a stake now. It could take a while for both companies to catch up to the more prominent players that are close to generating $1 billion in revenue for the year. That said, looking at their expansion rate, I do not doubt that with a bit of patience, both these sizzling pot stocks are capable of making investors rich over the long run.
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Stock Advisor launched in February of 2002. Returns as of 12/18/2021.
Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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