The marijuana segment has been one of the hottest areas of stock trading since the election win by President Joe Biden. While there are no assurances the Democrats will decriminalize recreational pot—despite controlling all three branches of government—the market clearly believes it will happen.
While all of this plays out, my view is that the weed sector will be strong and profitable longer-term after a period of growing pains.
An intriguing play on the U.S. pot sector with a strong risk/reward ratio is 4Front Ventures Corp (CNSX:FFNT, OTCMKTS:FFNTF).
4Front Ventures is a growing vertically integrated cannabis company. That means it controls the entire process, from research and development to cultivation, production, distribution, and sales.
The company runs cultivation and retail facilities in five states: Washington, Massachusetts, Illinois, Michigan, and California.
FFNTF stock has already made a strong move, up 80% over the past three months and up 21% in January. 4Front Ventures stock traded as low as $0.17 during the March 2020 sell-off before taking off.
Chart courtesy of StockCharts.com
Watch for Big Revenue Growth as Capacity Accelerates
4Front Ventures is in its early stages, but its growth trend is encouraging.
The company’s revenues surged 741% to $41.3 million in 2019, up from $4.9 million in 2018. The current consensus analyst estimate has the company ramping up its revenues by 175% to $85.5 million for full-year 2020. (Source: “4Front Ventures Corp. (FFNTF),” Yahoo! Finance, last accessed February 1, 2021.)
For FFNTF stock, the key at this time is the company expanding its capacity and increasing its distribution network.
In terms of capacity, 4Front Ventures is constructing a new 185,000-square-foot production facility in California. (Source: “4Front Ventures to Complete 185,000 Square Foot Manufacturing Facility in Commerce, California,” 4Front Ventures Corp, November 24, 2020.)
The company will likely not report positive earnings before interest, taxes, depreciation, and amortization (EBITDA) until at least 2021.
(Source: “4Front Ventures Corp.” MarketWatch, last accessed February 1, 2021.)
Moreover, 4Front Ventures has been recording generally accepted accounting principles (GAAP) losses, but the fact that the company’s revenues have been ramping higher is good news.
|Fiscal Year||GAAP Diluted EPS||Growth|
(Source: MarketWatch, op. cit.)
Another positive sign is that analysts estimate that 4Front Ventures narrowed its adjusted loss to $0.03 per diluted share in 2020, prior to potentially making adjusted profits of $0.01 per diluted share in 2021. (Source: “4Front Ventures Corp. (FFNTF),” MarketWatch, last accessed January 29, 2021.)
The company’s balance sheet carries about $125.0 million in debt, but with the new capacity coming online this year, my view is that the higher revenues and move toward profitability will drive free cash flow and debt reduction. (Source: Yahoo! Finance, op. cit.)
The outlook for the pot sector is more bullish now than it was before the U.S. election. As more states move toward legalizing medical and/or recreational cannabis, 4Front Ventures Corp will likely benefit.
I’m excited to see the rollout of the company’s new production facility in California. If everything falls in place, 4Front Ventures stock could see significant price appreciation.