Best to Accumulate Shares Than Plunge In and Out
Some stocks you plunge into with substantial investment of one’s purse. We did that several years ago buying Cresco Labs Inc. (OTCQX: CRLBF) (CSE: CL). I wrote about the nascent marijuana business for investment opportunities later writing several articles specifically about CRLBF. The industry was a star for a while and then lost its luster. We are holding on to our shares and slowly accumulating more because of management’s qualifications turning the young, fast-growing company into a sustainable, vertically integrated cannabis company.
However, today, the pandemic is raging, the economy is floundering, and analysts are scaring investors with howls the stock market is set for a pyroclastic downward flow. Let me make two suggestions here for retail value investors with money. First, pay off credit card debt. Interest rates border on usury and no politician is championing lowering rates let alone waiving payments of obscene interest rate charges on credit card debt.
Second, if you have money to invest from savings, retirement accounts, and it is money you cannot afford to lose, buy shares of companies in these essential industries: food and beverages, defense, and cannabis. Biotech and pharma are okay too but take forever to bear fruit and have high risks for R&D setbacks.
After an initial buy into CRLBF, we have slowly, in small numbers, accumulated more shares at various prices. The process is more akin to collecting stamps, wine, and antique cars. Nothing that has happened in the company or its operations has changed my positive outlook. I believe the stock is oversold and may be near to a support base of above $5. There is insider-buying, trading volume is higher than usual the past week or so, and based on past performance, products from Cresco Labs remain in demand so revenues and eventually earnings will grow.
Conditions Persist to Erase the Bloom Off the Plant
Here is where the company stands today. Prices of marijuana shares are down primarily because the cannabis industry did not break-out following its initial gleam and flirtations with big brother buyers. Also, anti-marijuana factions in states and at the national level block legal and regulatory reforms. CRLBF's share price is down a third over the past 52 weeks like most other small-cap stocks.
According to CNBC’s Maggie Fitzgerald,
Small-cap stock performance relative to large-caps is near its worst since the financial crisis (2008)…Small caps are in an earnings recession, with balance sheets stretched by high debt.
Other stressors include
- cash constraints are hampering the growth of a slew of cannabis companies,
- the snail pace reform of federal laws and regulations giving new meaning to the Congress and Executive branch, dolce far niente: the art of doing nothing,
- cognitive dissonance still rules the legalization arguments: older adults are smoking pot but the highest numbers are among younger people with the lowest percentage of voters; concomitantly, there is greater use and growing acceptance of medical marijuana among older folks while younger populations want legal recreational use,
- the surging numbers of class action securities lawsuits in the U.S. add to the expenses and cash drain of companies defending against them worries investors,
- constant revelations and attacks from the scientific community on the negative effects of cannabis use, smoking pot, and vaping force adjustments in marketing, and
- every stage of legal marijuana is highly regulated by states and local governments adding to the costs of doing business including the lack of access to banking, financial services, and which brokers can trade pot stocks for investors.
From Major to Minor: Pot Stocks and CRLBF Today
Attitudes toward marijuana’s availability seem to be changing. The House is considering legislation and the Senate might take it up after the November election. Meanwhile, sales of marijuana are booming. There is a definite sense of interest bubbling about marijuana stocks again.
Two examples. The North American Marijuana Index tracking of leading pot stocks reports a 52-week low for the Index sinking to $43.35 from a high topping $193. But, since March, ’20, the Index price of the 49 constituents has climbed up to $107.90. In marijuana news, August and September are witnesses to an increasing number of posts and publications across the financial media.
Risks and Potential
The primary risks for buying Cresco Labs are changing from earlier years. The company assumed debt and holds about a year’s worth of cash based on the latest report. Real estate assets were sold and leased back. Shareholders were diluted in the past year.
On the positive investment side, management has extensive experience in real estate, so I believe they know what they are doing selling these assets to finance Cresco Labs' operations with accelerating sales across all facets from seed to retail. Along with popping sales, earnings are forecast to grow by 97% for the next three years. Suffice to say, on August 20, Seeking Alpha reported the Cresco Labs Q2 ’20 results from the company:
- Record revenue of $94.3 million, 42% growth QoQ
- 30+% sequential revenue growth in all of the company’s U.S. markets except Massachusetts
- Record adjusted EBITDA1 of $16.5 million, 419% growth QoQ
- Reduced SG&A by $1.5 million QoQ
- Wholesale revenue growth of 44% QoQ to $55 million and retail revenue growth of 39% QoQ to $39 million
Moreover, Cresco Labs produces and sells its products through a plethora of outlets in 9 states, from 15 production facilities, holds 29 retail licenses, and owns 19 dispensaries. It wholesales products to other retailers to widen its product brand recognition.
The company currently reports holding +$70M cash. Debt is $285M. Cresco Labs operated for years with no debt. Today, its debt to equity ratio is an acceptable 16.2% and not presenting any worrisome risk.
Analysts remain universally bullish on CRLBF generally not recommending any selling of the stock. Some, like Simply Wall Street and Yahoo, have a $20 price target, while others and I see somewhere between $13 and $15 per share if the momentum about marijuana stocks and Cresco Labs in particular continues.
The current Market Cap is $1.27B consistently higher Y/Y. The Enterprise Value is up to $1.49B driven by taking on debt that seems manageable with soaring revenues. Nearly 2% of shares are still held by insiders though, in the past three months, purchases by insiders far exceed sales of their shares.
A small but encouraging stimulant to any retail investor is that the total compensation Cresco Labs’ CEO is below average for companies of similar size; it is more in tune with company performance than others in the industry.
Another indicator of growing interest in marijuana stocks and CRLBF, in particular, is the increase in trading volume. The 3-month average of shares traded is 589K is now nearer to 800K.
What If Pot’s Legal?
On the larger front is the potential for the legalization of recreational marijuana beyond medical marijuana. I worked for two decades in administrations of state governors and as a consultant to the U.S. Surgeon General. I learned not to predict the outcomes of any political events in the offing. A blue wave win in November is likely to boost marijuana stocks but it is not certain a red wave will not do the same in the long run. There are pressures to de-schedule marijuana, let the states go their ways, attach a federal sales tax, and expunge criminal records for possession and use of marijuana. Democrats support these measures and Republicans are not loudly objecting but they are likely waiting until after the election. Marijuana is largely a non-starter in the campaign noise.
According to the Drug Policy Alliance,
There is more public support for marijuana law reform than ever before with new polls showing more than half the country is in favor of legalizing marijuana.
One more reason to buy CRLBF is the marijuana business is a highly regulated industry. Typical operations experience and marketing know-how are not enough to build for success in this industry. Not when securities regulators, law enforcement, agriculture inspections, food, and drug government agencies are on the watch. The CEO brings extensive legal regulatory compliance experience to the company.
Others on the board bring a similar experiential education to this industry including some new electees. One board member traded futures in a highly regulated industry. Two board members are real estate and construction company leaders familiar with compliance issues; there is a litigation and employee rights lawyer on the board, and three others are from the heavily regulated mortgage industry, telecommunications, medical and hospital administrations. Their range of subject knowledge is valuable but so is their experience with building success under strict regulatory control.
Accumulate Shares Each According to Their Ability
My takeaway is to nibble at the pot (pun intended) and accumulate shares at prices an investor feels comfortable. Build a collection of shares in Cresco Labs because the risks today seem underwhelming compared to the positives including the regulatory experiences board members and management bring to the company.
The novel coronavirus economy is giving an economic boost to food producers, distributors, and record revenues. The marijuana industry is such a kluge that some financial reporters classify it as pharma business, farming, agriculture, or a member in the medical supply industry. Cresco Labs brings it all together under one umbrella across nine states in some of the most populated states with a love for the flower to edibles, retail and wholesale.
The price might fall if the rout in the market continues. But it is worthwhile at these prices to pick up shares slowly for the long term. Another government economic relief gift may not come any time soon caught in the tenacious web of fear for giving a win to the Executive branch or the Legislative branch, but no matter. It seems more people are working, as unemployment claims fall. People with income may not rush to buy retail clothes or a new car but marijuana is a staple. They will buy it like instant coffee and ketchup. Cresco Labs is going to benefit and so will its investors one day sooner than later.