While the U.S. is pushing forward to decriminalize recreational cannabis, many don’t realize that the use of cannabidiol (CBD) is already legal in the country. CBD products contain only insignificant amounts of tetrahydrocannabinol (THC), the ingredient that causes the “high” sensation.
The potential of the CBD market is underappreciated. You can play that market via micro-cap cbdMD Inc (NYSE:YCBD). The company grows, produces, and distributes high-quality CBD in the U.S.
Notably, cbdMD has expanded into the rapidly growing CBD pet products market.
YCBD stock is up 300% from its March 16 low of $0.50, but it’s down 50% from its August 10 range high of $4.10. The stock is down 42% over the past year and is underperforming its peer group.
Chart courtesy of www.StockCharts.com
The extreme volatility in cbdMD stock is not unusual for a company of this scale operating in a sector marked by uncertainty. But for aggressive risk capital, YCBD stock is worth a look.
Revenues Have Surged
cbdMD reports in a fiscal year ending at the end of September.
The company, like the legal marijuana sector in general, is only beginning to ramp up its revenues. cbdMD has made strong progress in the past three fiscal years, with record revenues in fiscal 2019.
(Source: “cbdMD Inc.” MarketWatch, last accessed November 5, 2020.)
But while the revenue estimates have been drifting lower due to previously overly optimistic targets, cbdMD is still expected to drive its revenues 75% higher to $41.4 million in fiscal 2020. For fiscal 2021, the growth rate is estimated to fall to 22%, to $50.5 million. (Source: “cbdMD, Inc. (YCBD),” Yahoo! Finance, last accessed November 5, 2020.)
While it’s clear that the earlier estimates for the majority of cannabis companies were too high, the reality is that the growth is still strong.
cbdMD has been reporting negative generally accepted accounting principles (GAAP) diluted earnings per share (EPS); earnings before interest, taxes, depreciation, and amortization (EBITDA); and free cash flow (FCF), but it’s on target to report adjusted profitability in fiscal 2020.
|Fiscal Year||GAAP Diluted EPS||Growth|
(Source: MarketWatch, op. cit.)
For fiscal 2020, analysts estimate that cbdMD Inc will earn an adjusted profit of $0.72 per diluted share, a major improvement from the adjusted loss of $2.54 per diluted share in fiscal 2019. The company easily beat the consensus EPS estimates in the first three quarters of fiscal 2020. (Source: Yahoo! Finance, op. cit.)
Those strong results are expected to be followed by an adjusted loss of $0.04 diluted share in fiscal 2021. But given the uncertainty in the economy, the actual results could be drastically different.
For now, cbdMD has strong working capital, with debt of $9.1 million and cash of $15.1 million. That’s fine in the immediate term. (Source: Yahoo! Finance, op. cit.)
cbdMD Inc is a good way to play the growing CBD market. The company’s move into CBD pet products has been going well.
Trading at three times its estimated fiscal 2021 EPS, YCBD stock looks cheap, especially if the company turns out better results in fiscal 2021. Moreover, the stock trades at a mere 1.5 times book value.
The bottom line is that cbdMD stock is volatile, but the upside prospects compensate for the risk. Accumulating shares on price weakness makes sense.