The cannabis sector has been under pressure this year providing an opportunity to enter some attractive sector stocks with catalysts for stock gains in the 2H of 2019. One such company is KushCo (KSHB) that provides ancillary products to the cannabis and hemp sector. The company benefits from sector growth and a major catalyst that should help the biggest risk to the story.
Picks and Shovels Play
KushCo provides the vape products, packing, supplies and accessories needed by the major cannabis brands to cultivate, produce and sale cannabis and hemp products. A prime example of the products sold by the company is the recent deal to sell biodegradable packing solutions for the sector through SunGrown.
For this reason, KushCo is positioned to benefit from the ultimate growth in the cannabis sector supply and demand growth without risking the creation of brands or products that consumers want inherent in any retail operation. For this reason, the company generated FQ3 revenue that ended May 31 of $41.5 million, up an incredible 221% from last year and 17.9% sequentially.
The biggest issue for the company expected to generate up to $250 million in revenues next fiscal year is profit margins. Gross profit doubled from last year, but gross margins only reached 18%. On a non-GAAP basis, gross margins reached 23%.
The company has a long way to go before achieving profits with SG&A expenses over $20 million and a meager gross profit of about $9.5 million. The quarter ended with a much-improved adjusted EBITDA loss of $7.5 million, but KushCo only has a cash balance of $12.2 million. A few more quarters of these losses will require more cash to fund growing operations.
The major catalyst for the stock is a projected uplisting to the Nasdaq. KushCo announced a filing with the major U.S. stock exchange on July 8. Such a listing could allow the company to obtain greater liquidity and likely execute a secondary offering that would provide the cash to fund operations while reducing the current risk of a weak balance sheet.
Investors need to understand that an uplisting induced rally would probably be followed by a secondary offering that hits the stock hard similar to the one in January. Of course, other options exist to fund growth including a merger or equity investment that would likely induce a stock rally.
The stock has a market cap in the $440 million range. Being a supplier to the large U.S. multi-state operators and the Canadian LPs. is probably one of the best ways to play the growth of the global cannabis market from $10-$15 billion in annual sales to analyst targets in the next decade to the $200+ billion range.
KushCo doesn’t have to worry which MSO or LP generates the most growth, the company just has to play the sector trend and focus on providing the best products for both cannabis and hemp products.
The key investor takeaway is that KushCo provides a unique way to play ultimate cannabis and hemp sector growth. The company is supplying the industry with innovative new products such as biodegradable packaging.
An uplisting to the Nasdaq should provide a major catalyst for the stock along with an avenue to eliminate the risk: funding. The stock is a risky buy below $5, but cannabis industry stocks trading for less than 2x forward sales are hard to find. For risk adverse investors, the best way to own KushCo is to just wait for another fundraising and pick up the stock on any weakness.
Disclosure: No position.