The 1 high-risk marijuana stock I just bought – The Motley Fool

Marijuana sales exceed $ 150 billion a year and, although most of these sales are taking place in the shadow of the black market, the legalization of marijuana is gaining momentum around the world. According to a recent Gallup study, 66% of Americans support the legalization of cannabis in the United States. In November, Michigan became the 10th state to approve marijuana for recreational purposes, while Missouri and Utah became the 32nd and 33rd states to approve marijuana laws for medical purposes.

North of the border, Canada's national market for medical marijuana already generates about $ 600 million in revenue. After electing the Liberal party to power in the last election, the country opened its adult marijuana recreation market in October. Progress is also being made to remove barriers to marijuana use in other major countries, including Germany and Australia.

The potential for a significant amount of money to move from the black market to regulated markets is an opportunity that can compete with the markets for alcohol and tobacco, so that investors are naturally interested to buy marijuana shares. Many companies are looking to generate significant sales through the production, distribution and sale of marijuana, but when selling marijuana shares last week, I bought the vendor from Marijuana packaging. KushCo Holdings (NASDAQOTH: KSHB) instead of. Here's why I want to own this small, high-risk marijuana stock.

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Risks galore

Make no mistake, marijuana stocks are risky. It is very likely that many marijuana companies will not survive and ultimately only a few of them will become large enough companies to support the assessments already made by investors.

Nevertheless, I think that there is a good reason for KushCo Holdings to be one of the companies that not only survive but also thrives as marijuana grows in Main Street.

The company does not earn money by growing cannabis that it can sell in clinics. Instead, it sells the highly regulated packaging that the legal marijuana markets require for potted products.

This strategy of supplier of picks and shovels makes agnostic which company ends up winning the largest market share in the markets of medicine and recreation. After all, each of these newcomers, large and small, must package their products according to the rules defined by each jurisdiction, and these rules may vary, which requires working with a trusted provider such as KushCo.

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Business up to now

KushCo manufactures a wide variety of packaging products, including oil bottles and roll products, and also markets products such as solvents that producers use to extract cannabinoids from marijuana to make oils and products. 'others products. In addition, earlier this year, she acquired a graphic design agency for cannabis and non-cannabis brands, dubbed The Hybrid Creative.

Since its inception, it has already sold more than a billion products. As its products are sold to 5,000 dispensaries, producers and producers for medical and adult use, no company accounts for more than 10% of its sales. With this type of diversification, I think this is pretty well isolated from the risk associated with the bankruptcy of customers.

Last year, total preliminary sales increased 171% to $ 51 million, including $ 19 million in the fourth quarter of the year ended August 31.

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Future opportunity

KushCo Holdings' sales will benefit from the fact that more states will adopt legislation that is supportive of broken pots, which will likely involve stringent packaging requirements, and that producers will focus more and more on packaging. Use of marijuana in value-added products enjoying increased pricing power and offering them higher margins.

Legal marijuana sales account for a small share of the $ 50 billion worth of marijuana sold each year in the United States, but legal sales are growing rapidly. For example, Colorado operates one of the most successful markets for marijuana. Its sales reached $ 1.5 billion last year, against $ 684 million in 2014. In California, the largest US market, legal sales could rise from less than $ 4 to $ 7.7 billion in 2021. billion this year, according to BDS Analytics. The maturing markets, a wider product selection and more states adopting laws ending the prohibition could generate $ 96 billion in legal and medical revenues in 15 years in the United States, according to a wine, beer and liquor business Constellation Brands.

KushCo also has a lot of potential to supply products elsewhere. The Canadian Leisure Market Could Generate Billions of Dollars of New Sales in the Next 12 Months, and New Products Using Cannabis as an Ingredient, such as Pops, Edibles and Beverages, Could Win a Regulatory OK in Canada in 2019, providing even more demand. for packaging, extraction technologies and KushCo's advertising expertise. According to Deloitte, sales for adults in Canada could exceed C $ 4 billion next year, and in 15 years the Canadian drug and recreation market could be as high as $ 11 billion, according to Constellation Brands.

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Europe is also a great growth opportunity. The emerging market for medical marijuana in Germany is already serving up to 50,000 patients and industry observers believe that it could be a bigger market. important than Canada's over time. For perspective, Aurora Cannabis, one of the largest cannabis companies in Canada, recently announced that its revenues in Europe were up 127% over last quarter. If more countries legalize marijuana, Constellation Brands believes cannabis products could be worth $ 200 billion in 15 years.

If Constellation Brands' forecasts are close to the target, then KushCo Holdings should have a good chance of winning business, increasing sales and eventually generating profits.

But many could also go wrong for society. Marijuana is still illegal in the United States at the federal level, so Washington, DC could crack down on the markets of different states. If they do, it would be bad news for KushCo Holdings. Similarly, outside regulators in the United States may be reluctant to legalize, which would reduce the global market opportunities for society.

In addition, KushCo Holdings is an expensive action to purchase using traditional valuation measures. it trades on the slightly regulated OTC market; and its balance sheet does not have a lot of money compared to Canadian marijuana growers. This summer, the company added $ 32.9 million from a direct share offering to its $ 3.6 million cash balance coming out of May, but this remains minimal compared to the previous year. the $ 147.8 million in cash available to Aurora Cannabis.

Nevertheless, I still bought shares of KushCo Holdings last week when marijuana stocks plunged because I think the reward justifies the risk. Everyone guesses where these shares will trade in the coming months, but I think the odds of considering it as a much bigger company in 10 years compared to today.