As we see it, the cannabis investment opportunity is ultimately driven by the inexorable march off legalization.
But there’s another factor that many people don’t consider when thinking about this march: it is ultimately driven by fiscal considerations – ie, by public debt held by states and ultimately by the federal government.
Why?
The logic goes like this: government researchers and policymakers are perfectly aware that, whether it’s legal or not, people are going to consume marijuana for recreational purposes. They always have and they always will. So, once you concede that fact, then keeping pot illegal is simply making the choice to spend money on law enforcement and take in no taxes on weed sales. Legalization reduces public costs and increases public revenues. It’s just that simple.
That’s why it should be no surprise to see this rumor coming out of DC right now, as the fight to support the economy in the age of the virus crushes public balance sheets: the House of Representatives is planning a floor vote on federal cannabis legalization for September, an aide to a key congressional committee chair and several advocates tell Marijuana Moment.
According to the pot-related publication, there’s a complicated path ahead and a tight calendar that could complicate things, but that’s the plan, the sources say.
So, while there may be plenty of money lining up to storm the offer in pot stocks into November, that may actually be late to the real party, which could be on the way in coming days and weeks as the market starts to front-run this landmark vote in September in the House.
And one stock that may be best positioned to benefit, simply due to valuation issues, could be Sugarmade Inc (OTCMKTS:SGMD), a cannabis player that operates now mostly through its stake in the BudCars cannabis delivery business, a leading California mobile delivery-based dispensary business that has been massive growth on strong margins so far this year, but still trades at under a penny per share.
Why Now?
The cannabis stock space has been through a brutal bear market in recent years. But the bottom looks to be in for the sector, with a capitulatory low that hit in March. That said, we are still seeing a clear underpricing of stocks in the space based on the growth in sales many pot companies have been registering in recent months.
Sugarmade Inc (OTCMKTS:SGMD) is a good case in point.
The company just issued a mid-month performance update for the month of July, which is now on pace to set multiple new company performance records for sales, gross profits, and total customer orders. According to the release, SGMD is on pace to meet or exceed its target of $650,000 in total sales in July, with well over 5,000 individual customer orders likely this month, suggesting that sequential month-over-month topline growth will be at or above the company’s target 30% level.
“Our BudCars Sacramento hub continues to demonstrate accelerating growth that suggests we still haven’t really found the ceiling here in terms of period-over-period upside potential,” commented Jimmy Chan, CEO of Sugarmade. “Ultimately, this is gratifying to see because we have taken a unique approach to retail cannabis product distribution.”
Depending on how you value SGMD’s BudCars sales stake, if you do the math and follow the current projections forward, it’s not hard to see that stake backing somewhere between $12-30 million in annualized sales by year-end. With a market cap under $4 million, that means SGMD is trading, at best, at less than a fifth of the typical price-to-sales valuation of other pot stocks right now.
Put another way, it would theoretically take at least a 400% rally in shares to bring it into line with other companies in the space.
Why Else?
One factor that may help push the US Federal Govt to lean toward helping nudge state regulators to legalize pot nationwide is the fear of having to bail out a long list of states entering bankruptcy sometime next year, which wouldn’t be too surprising if we aren’t looking at widespread distribution of a vaccine until summer 2021 – it will take months after approval to manufacture and distribute.
In addition, as noted in the Marijuana Moment article, an official from the White House Office of National Drug Control Policy’s National Marijuana Initiative admitted in testimony before lawmakers that teen cannabis use is going down in states that have enacted legalization—contrary to fears often raised by prohibitionists.
This is huge because it is quantifiable evidence that legalization actually produces a marketplace that is easier to regulate. In other words, we finally have hard data that can push back against the claims of people who might otherwise be loud voices in the room standing against this type of move.
And finally, as we noted above, the almighty dollar is the main thing here. People will be smoking joints either way. Might as well make a buck off it, Uncle Sam.
As that logic works its way through the mind of Mr. Market, it may well spur some interest in smaller names in the cannabis space, particularly those that can be held up as “cheap” in traditional terms, like Sugarmade Inc (OTCMKTS:SGMD).
