We have seen two identifiable bull cycles in the cannabis space over the past decade, and we have strong reason to suspect that we are now embarking on a third, which started just over two months ago, during the March panic that decimated all risk assets following the outbreak of the global COVID-19 pandemic.
If this perspective is on target, then investors would do well to have a keen eye locked on the cannabis sector because many of these stocks – especially the newer operators with strong growth and lighter balance sheets working from smaller bases – could represent significant opportunities over the next 12-24 months.
One such name is Cannabis Strategic Ventures (OTCMKTS:NUGS). We point this stock out because the company has been reporting dramatic revenue growth in the past several months from a very small base. It would appear that the company is simultaneously benefitting from expanding production capacity, ramping sales volume, and increasing pricing on a unit basis, with a very favorable macro context acting as a tailwind.
All Cylinders
Cannabis Strategic Ventures (OTCMKTS:NUGS) just announced new projections for its calendar Q2 sales data that should be noted. According to the company’s release out this morning, NUGS is now on pace for over $2.7 million in quarterly sales and approximately $11 million in annualized sales, based on its performance in April and May.
Management doesn’t appear to have been made complacent by this data. Which is another good sign.
“We believe we can drive further significant organic growth from current levels,” noted Simon Yu, CEO of Cannabis Strategic Ventures. “Current performance is being driven by multiple factors, including volume, capacity, and pricing, all aligning with a strong macro environment in the California cannabis marketplace. For some perspective, our June quarter is on pace to eclipse our March quarter by well more than a factor of 10x on the top line.”
In addition, management noted that the company has increased its size of harvest by as much as 2.5x and progressed from booking sales well below industry-standard pricing to selling at an 11% premium to industry-standard pricing due to improvements in product quality. Volume sold has also continued to rise sharply on a week-over-week, month-over-month, and quarter-over-quarter basis.
According to the company’s release, April sales set a new record at NUGS, with more than $870K in total sales of cannabis products. May figures are now in the books, with sales of $929K. Management notes that early figures from June sales suggest a continued trajectory of month-over-month growth as well.
Yu continued, “We are running with a strong tailwind right now, but we are also unquestionably seeing a pay-off from a number of operational decisions put into place over the past year, including moves to expand production capacity and to overhaul our operations at the farm at a fundamental level, which has resulted in a sharp and steady rise in pricing on a per unit basis.”
Sky = Limit
The notion of a new cyclical bull market in the cannabis space is supported by seasonal, cyclical, technical, sentiment, and supply-side factors.
From a birds’ eye view, we reached a deep level of pessimism before the March crash, with many publicly-traded cannabis names already succumbing to bankruptcy and default, thinning out the herd. With the crash and its wake, the remaining names went from oversold to historically distressed, opening up a path for a new bull cycle built of more reasonable governance and balance sheet standards.
Seasonal factors are also in place, as outdoor growers have months to go before their next harvest in the late fall. At the same time, the COVID-19 pandemic has spurred shortage conditions in cannabis supplies in the California marketplace.
With debt restructured, supply lacking, the herd thinned out, and speculative capital yet to rediscover these stocks, names like Cannabis Strategic Ventures (OTCMKTS:NUGS) – where growth is tangible and far outpacing what we see in most more mature industries – offer equity investors an opportunity to align with a long-term structural growth theme now hitting its cyclical stride before the next wave of hype sets in, as it inevitably will. These are pot stocks, after all.
