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To get a massive return on your investment, you often have to take above-average risk, such as buying a stock that is not widely appreciated on Wall Street. Investing in such obscure or unpopular businesses can be scary, but in a hot industry like cannabis, time can be on your side.
For example, Village Farms International (NASDAQ: VFF) and Planet 13 Holdings (OTC: PLNH.F) each still trades for less than $ 10 a share. Both appear poised for rapid growth over the next several years, but despite their merits, neither has received the recognition it deserves – yet.
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1. Village farms
Village Farms International has the potential to become a cannabis colossus. Most people know the company for its non-cannabis products like tomatoes, cucumbers and peppers, which it all grows in its greenhouses in the United States and Canada. But since he acquired a Canadian cannabis grower Pure solar farms in November 2020, its goal changed.
While it is too early to know how the acquisition will unfold, the premise is that Village Farms will be able to leverage its expertise in indoor cultivation to boost the efficiency and scale of its new operations. marijuana. So far, so good. In the first quarter, revenue grew 63.2% year-over-year, largely thanks to the addition of $ 17.4 million in cannabis sales. And compared to the first quarter of 2020, Pure Sunfarms generated 43% more revenue.
After such an earnings report, it can be hard to believe the stock hasn’t exploded. But there’s a reason Village Farms is still a diamond in the rough. Even with its new cannabis business, its overall profitability is extremely tenuous, with a net margin of 0.02%. In short, greenhouses are expensive to operate, and the company assumes (based on its extensive experience) that its products will sell, on average, at prices that outweigh the additional expense.
In the midst of the chaos of 2020, this assumption did not hold. Tomato prices quickly slipped into lows that eroded Village Farms’ gross margins. As tomato prices pick up, expect the company’s profit margin to rebound as well. By this time, the growth in his income from cannabis sales could make his stock quite enticing for investors.
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2. Planet 13
While Village Farms’ competitive advantage stems from its expertise with greenhouses, Planet 13 Holdings’ (OTC: PLNH.F) competitive advantage is a matter of location. Its most important asset is a large retail space located right in the center of Las Vegas. More than a million visitors walked through the doors of this store alone in 2019, when it accounted for 9% of cannabis sales across the state of Nevada. The company generated $ 77.5 million in revenue over the past 12 months, and its expansion in late 2020 to another dispensary in Nevada contributed to a 41.8% revenue growth in the first quarter.
Unlike other cannabis retailers, Planet 13 aims to make the trip to the dispensary a fun experience in its own right. Serving this goal, its supermarkets will offer cafes and interactive art installations, not to mention a plethora of aesthetic factors that make up its characteristic energetic ambience.
To fuel future returns, management rightly assumes it will have to look for new opportunities beyond Nevada’s borders, and the goal is to have at least eight new hypermarkets in operation by 2026. But all markets not suitable for planet 13. The company is targeting the upper level of the cannabis market, so it will only open new locations in places with enough wealthy consumers to support its business model.
This is part of the reason why some investors might not be impressed with Planet 13 – so far it has not been proven to work outside of Las Vegas, where it costs next to nothing to find a constant stream of ready customers. pay a premium for a single product. cannabis buying experience.
In light of all this, the company’s decision to open a new supermarket in Santa Ana, California can rightly be viewed with a bit of skepticism. Orange County isn’t exactly crowded with spendthrift tourists, and the California cannabis retail market is crowded. The new location opened at the end of June, so it will be some time before shareholders have a full picture of the store’s performance over a full quarter. If Planet 13 eliminates the park’s revenue expectations, that will be a strong sign that this is a good buy for long-term growth.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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