Aditya Raghunath


Why these three stocks are well poised to take advantage of the cannabis boom.

Marijuana investors have seen a massive erosion of wealth over the past 12 months. Companies in the cannabis sector were expected to consolidate sales in a high-growth market in 2019; instead, they were affected by lower-than-expected growth, high inventory levels, regulatory issues, health concerns arising from the use of vaping products, and more.

Marijuana for recreational use was legalized in Canada in October 2018, but in the U.S., cannabis consumption is still illegal at the federal level. The ongoing relaxation of U.S. marijuana laws will no doubt benefit the entire cannabis industry, as several vertically integrated multi-state operators will pounce on the opportunity to drive sales and expand market share.

Legalization efforts should resume after the COVID-19 threat subsides and governments can refocus on other economic priorities. As of April 14, marijuana is fully legal in 12 states in the U.S.; according to Fool contributor Sean Williams, states including New Jersey and Arizona might soon legalize recreational use of cannabis, while Nebraska might give the go-ahead for medical marijuana in the upcoming months.

Here’s a look at three cannabis stocks that are well poised to benefit from the statewide legalization of medical and recreational marijuana products.

A top cannabis supplier

Scotts Miracle-Gro (NYSE:SMG) is not a pure-play marijuana player. It is well known as a leader in lawn care and home improvement in the United States, and over the past few years, the company has managed to leverage its legacy operations to enter the high-growth marijuana space.

Scotts Miracle-Gro is not a licensed marijuana producer. Instead, the company supplies hydroponic gear via its Hawthorne business, which was established in 2014. This segment is focused on hydroponic growth and aims to build a solid portfolio by acquiring companies in the nutrients, ventilation, and lighting verticals, which are essential for indoor gardening.

These services are used by both legal and illegal marijuana growers who need hydroponic equipment. Acquisition-driven growth resulted in a 95% uptick in sales for Scotts Miracle-Gro’s Hawthorne business in fiscal 2019. In the December quarter, Hawthorne sales were up 41% year over year at $198.8 million and accounted for 54.3% of the total.

Scotts Miracle-Gro has not looked to build a portfolio from scratch to serve the growing marijuana industry. It has instead relied on acquisitions to gain traction. These acquisitions were funded by debt, and a less-than-impressive balance sheet helped to drive the stock lower by 43% in 2018.

As marijuana legalization continues to gain pace, Scotts Miracle-Gro will be one of the top beneficiaries, which will help the company drive top-line results in the upcoming decade.

A profitable cannabis player

One of the top stocks in the cannabis space is Canada-based Aphria Inc. (NYSE:APHA). It has managed to record a profit in two of the past three quarters, at a time when most of its peers are struggling with mounting losses and declining cash balances. In the quarter ended in November 2020, it reported sales of $120.6 million Canadian dollars, compared with sales of CA$126.11 million in the August quarter.

The company’s acquisition of CC Pharma early in 2019 helped Aphria establish a robust distribution network in Europe’s huge medical marijuana market. As the company said in a press release, “Through the acquisition of CC Pharma, the company obtained a leading importer and distributor of EU-pharmaceuticals for the German market.” Specifically, CC Pharma “operates a production, repackaging and labelling facility” with “over 317 active German national pharmaceutical licences, 690 active EU pharmaceutical licences, and access to approximately 13,000 active pharmacy accounts.”

Distribution revenue in the first two quarters of fiscal 2020 stood at CA$181.8 million, or 74% of total sales. Aphria should be able to leverage its huge distribution network and massive production facilities to take advantage of marijuana legalization in the United States.

Aphria is already one of the top marijuana producers in the world, with three licensed facilities and a production capacity of 255,000 kilograms per year.

A cannabis real estate play

Another ancillary cannabis player is Innovative Industrial Properties (NYSE:IIPR). This company is a marijuana-focused real estate investment trust. We know that cannabis is still illegal in several states, which makes it difficult for licensed producers to raise debt capital for expansion and growth. IIPR solves this problem with its sale-leaseback business model.

Innovative Industrial Properties acquires properties from cannabis companies and leases them back to those companies, generating revenue for Innovative Industrial Properties and reducing capital expenditure for marijuana producers. As of April 2, Innovative Industrial Properties owns 54 properties totaling close to 4 million square feet of rentable space. With a weighted average lease term of 16.1 years, the company can count on a steady stream of cash flows even during an economic downturn.

Some of Innovative Industrial Properties’s tenants are large cannabis players, including Cresco Labs, Curaleaf, and Trulieve. As marijuana laws continue to be amended, demand for Innovative Industrial Properties’s real estate services is bound to increase, making it one of the safest bets in the sector. What makes the stock more attractive is its high dividend yield of 5.5%.

The cannabis industry is still in a nascent stage. According to a report from Research and Markets, the North American legal marijuana market is estimated to grow at an annual rate of 15.7% between 2018 and 2025 to reach $36.7 billion. This growth should drive revenue for several pot-related companies as the product is decriminalized in more and more states.

Author: Aditya Raghunath

Source: Fool: 3 Pot Stocks That Could Soar as States Eye Marijuana Legalization

BlackBerry and Etsy have lost considerable value in 2019, grossly underperforming broader markets.

Almost every investor has heard the adage “buy low, sell high.” The Oracle of Omaha, Warren Buffett, famously said: “Be fearful when others are greedy and greedy when others are fearful.” In other words, investors need to enter the market when it slumps and exit at its highs.

Contrarian investors follow a similar approach: They look at stocks that have lost considerable value, but have significant upside potential to generate wealth. Below are two such tech stocks that might be contrarian buys at their current prices.

BlackBerry stock is trading at a multiyear low

BlackBerry (NYSE:BB) exited the smartphone market in 2016. The company licensed its design and manufacturing to TCL, and pivoted to security software and services.

Nowadays, BlackBerry provides technology for the Internet of Things (IoT) for enterprises and government organizations. Its solutions include endpoint management and protection, embedded systems, transport asset tracking, secure communications, and alerts and crisis communication.

Recently, investors were unimpressed with BlackBerry’s soft performance in the enterprise software and services (ESS) business. Total IoT sales were also down 2% in the fiscal third quarter. Though revenue rose 23% year over year, it was primarily driven by the acquisition of Cylance.

That being said, BlackBerry remains part of a high-growth industry with enough opportunities for sustainable growth over the long term. The company has estimated its total addressable market (TAM) at $22 billion across verticals.

In the crisis communication management business, BlackBerry has forecast the TAM at $3 billion. The TAM for unified endpoint management, embedded software and endpoint security has been forecast at $3.2 billion, $1.8 billion and $14 billion respectively by BlackBerry.

BlackBerry is optimistic about its mobile threat-detection solution, which is driven by AI (artificial intelligence). This has been integrated with its unified endpoint management console, and other applications.

The company’s QNX platform continued to drive sales in the BTS (BlackBerry technology solutions) segment, and BlackBerry is pleased with the increase in QNX traction despite a slowdown in the global automobile industry.

The QNX business offers a range of secure software products. Though it’s currently popular in the autonomous vehicle space, QNX is looking to increase penetration in other verticals such as medical devices, robotics, and industrial automation. Market research company Gartner expects 250 million connected vehicles will hit the roads by 2020.

BlackBerry acquired Cylance for $1.4 billion , and will now have the first cybersecurity product for the automotive market. In the fiscal third quarter, Cylance contributed $40 million to BlackBerry revenue, accounting for around 15% of sales.

During the fiscal second quarter earnings call, BlackBerry CEO John Chen said:

With the addition of the Cylance AI security capabilities, we have the opportunity to provide a first cybersecurity platform for the auto market. JLR [Jaguar Land Rover] is the first to collaborate with us. We’re working with others in the auto industry, and those interactions look promising.

BlackBerry continues to win contracts with government organizations around the world, due to its focus on security and related services; it has contracts with 16 of the G20 governments. These contracts should result in a steady stream of revenue over the next few years.

To keep investors interested, BlackBerry needs to stabilize revenue from the ESS segment and increase the customer base in Cylance and QNX verticals.

Etsy aims to enhance the user experience

Etsy (NASDAQ:ETSY) is a marketplace for entrepreneurs to offer unique and creative handcrafted goods. The company is optimistic about long-term growth in this space and has valued the global addressable market at $250 billion. But what is likely to drive sales higher?

In the first nine months of 2019, Etsy reported a 23.6% increase in gross merchandise sales. Comparatively, revenue was up 35.9% in this period, to $548.38 million. By its third quarter (which ended Sept. 30), Etsy had over 2.4 million sellers offering 63 million items.

The company has been working on enhancing both buyer and seller experiences on its platform. In the third quarter, Etsy launched variation photos, which enable buyers to visualize color and design variations without the need for a separate listing. It also launched a tool making it easier for sellers to adopt this feature.

Etsy is also improving search capabilities on its platform. It has upgraded context-specific search-ranking algorithms from linear to nonlinear models. These changes have increased conversion rates, positively affecting sales figures.

During the Q3 earnings call, Etsy CEO Josh Silverman stated:

We believe that as we continue to iterate on this new, even more sophisticated modeling approach, our algorithms will learn and deliver a more personalized shopping experience, showing results more specifically tailored to each individual buyer’s tastes and preferences.

We’ve already seen a meaningful impact to conversion rates with our first launch of this new model, and think that’s just the beginning. Similar to our prior CSR [context-specific ranking] work, we expect to apply these search-model improvements to other areas of the business, like promoted listings, in order to increase the relevance of ad results and drive more revenue.

The company is also enhancing features on the Etsy app, which has a loyal base of customers, to create a rewarding and engaging experience for repeat buyers. It has improved the buyer onboarding experience, as well as features of the home-screen feed, search dropdown menus, cart modifications, and recommendations.

Etsy grew the number of active buyers by 20.7% and sellers by 26.9% year over year as of the end of the third quarter. According to analyst estimates, Etsy sales in 2019 might grow 34.6%, to $813 million. By 2021, its revenue might touch $1.24 billion.

Wall Street also forecasts EBITDA (earnings before interest, taxes, depreciation, and amortization) to rise from $140 million in 2018 to $301 million in 2021. These growth metrics make Etsy a strong buy, especially given the stock’s 38% decline since March 2019.

Author: Aditya Raghunath

Source: Fool: 2 Tech Stocks for Contrarian Investors

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