This Could Be a Big Opportunity
There’s no other way to put it: the U.S. stock market is bloated. After a prolonged bull market for most of the last decade, nearly everything has gotten more expensive.
Among the numerous types of businesses that trade on U.S. stock exchanges and over the counter, one industry has probably received more investor attention than most others: cannabis.
You see, over the past two years or so, the number of publicly listed pot stocks has increased dramatically. And investors have rushed toward them. Double-digit surges seemed like the norm. For the hottest tickers, we even saw some triple-digit gains in a matter of months.
But that also means valuations have gone through the roof in the marijuana industry. And it doesn’t help the case that most pot companies are in the early stages of their business.
The reality is that investors are betting on how much money these companies will make in the future, not what they are making now. As a matter of fact, it’s not unusual to see pot stocks commanding high double-digit price-to-sales (P/E) ratios.
And that’s why I believe it’s a good time to check out KushCo Holdings Inc (OTCMKTS:KSHB).
KushCo Holdings Inc
Compared to the most well-known pot companies, KushCo is running a rather unique business. The company does not grow any marijuana, but if you visit a pot dispensary, you’ll likely see some of its products.
How is that possible?
Well, while KushCo Holdings Inc does not produce weed, it is one of the biggest distributors of packaging, supplies, and accessories for America’s cannabis industry. The company’s products include bottles, bags, boxes, tubes, containers, vaporizer cartridges, and compliance labels. In just the packaging and labeling business, KushCo offers 1,500 stock keeping units. (Source: “OTCQB: KSHB June 2019,” KushCo Holdings Inc, last accessed June 28, 2019.)
Now, growing cannabis probably seems like a more exciting business than making bottles and pre-rolled cones. But KushCo sees an opportunity in the ancillary products side of the cannabis industry due to the complex and dynamic regulatory environment.
You see, cannabis is a highly regulated industry. Even in markets where pot is legal for recreational use, there could be different packaging and labeling requirements. As a result, it’s not easy for a business to navigate the child-resistant packaging requirements.
And that’s where KushCo found its niche. Since the company’s founding in 2010, it has already sold over one billion units of products to marijuana growers, processors, and producers in North America, South America, and Europe.
Today, KushCo’s wide range of products can support a variety of form factors, regulations, and brands in the cannabis industry. When a cannabis company wants to launch a new product, KushCo’s knowledge, experience, and expertise in the packaging and labeling business could help shorten the time it takes to bring that product to market.
As the pot industry grew rapidly, it shouldn’t come as a surprise that the ancillary side of the industry also expanded. And KushCo Holdings Inc was right there to capitalize on that trend. Just take a look the company’s latest earnings report and you’ll see what I mean.
In the second quarter of KushCo’s fiscal-year 2019, which ended February 28, the company generated $35.2 million of revenue. This represented a 238% increase from the $10.4 million earned in the year-ago period, and a 39% increase from the $25.3 million earned in the previous quarter. (Source: “KushCo Holdings Reports Second Fiscal Quarter 2019 Results,” KushCo Holdings Inc, April 11, 2019.)
Looking back, you’ll see that, in the past five years, KushCo Holdings Inc has achieved an average quarter-over-quarter revenue growth of 27%.
The neat thing is, despite delivering very impressive growth figures, KushCo stock didn’t shoot through the roof during the marijuana industry rally last year. In fact, trading at $5.02 per share, KSHB stock is up just nine percent over the past 12 months.
KushCo Holdings Inc (OTCMKTS:KSHB) Stock Chart
Chart courtesy of StockCharts.com
Let’s put that stock price into perspective. At $5.02 per share, KushCo Holdings Inc has a market capitalization of around $442.0 million.
KushCo Chairman and Chief Executive Officer Nick Kovacevich said the following:
As a result of a strong first half of the year, including the signing of a number of long-term supply arrangements-in-principle with several new large, well-known customers, we are raising our revenue guidance from between $110 million and $120 million for fiscal year 2019 to between $140 million and $150 million.
If the company reaches the midpoint of the guidance range and earns $145.0 million at the top line in the current fiscal year, its current market cap would suggest a P/E ratio of 3.05 times. As I mentioned earlier, companies in the pot industry often carry significantly higher P/E multiples.
Value cannot go unnoticed forever, especially from such a fast-growing business. If KushCo Holdings Inc gets more investor attention, it could be trading at seven-times sales, which still wouldn’t be a high multiple by pot industry standards, but would translate to a more-than-100% gain for KHSB stock.
In other words, if you are searching for pot stocks that still have upside potential in this bloated market, KushCo stock deserves a serious look.