Few industries have investors seeing green quite like the marijuana industry. The Horizons Marijuana Life Sciences ETF, the very first tradable cannabis exchange-traded fund, has more than tripled the year-to-date gains of the broad-based S&P 500, which is also having quite the year. Thanks to expectations that Canada will continue to ramp-up sales, Mexico joining Canada as a legalized recreational market later this year, and U.S. cannabis sales continuing to soar, marijuana stock valuations are getting pushed higher.
But as is the case with any industry, even the fast-growing type, there are always laggards. Some of these subpar performers are rightly trailing their peers, with fundamental or corporate governance issues holding them back. Others, however, could be budding bargains. Here are three such marijuana stocks that make for strong buys in June…
The first diamond in the rough that investors should strongly consider buying this month is ancillary player KushCo Holdings (NASDAQOTH:KSHB).
KushCo was clobbered recently after it uncovered accounting errors that caused it to restate its 2018 and 2017 financial results. The “errors” involved the categorization of shared-settled contingent considerations from two separate acquisitions (one in each year), which resulted in these shared-settled contingent considerations being recognized as equity instead of a liability. Once the accounting snafus were corrected, 2017 earnings were lifted by $1.6 million but more than doubled the company’s 2018 loss, to $24.3 million.
Accounting errors aren’t a good thing, and it speaks to the governance issues that new industries often contend with. On the other hand, however, note that this restatement had absolutely no impact on KushCo’s cash on hand, cash flow, or its sales, which are the figures that really matter here. While future acquisitions might merit a more thorough inspection, nothing here from a sales, cash flow, or cash-on-hand perspective looks out of place.
That gets us to KushCo’s trio of niche advantages, which is why I truly feel it’s worth buying (and why I purchased shares in the company last month). First, there’s the company’s core packaging and branding business. In order for growers to get product on dispensary-store shelves, growers need to meet a laundry list of packaging regulations. KushCo manufactures these packaging solutions, ensuring that more than 5,000 of its clients remain compliant with federal, state, and/or local laws. It also works with some of its clients on branding and package design to help them stand out in an increasingly crowded field.
Secondly, KushCo is involved in the distribution of vape products, including heating elements. The knock against this sales channel has been that the China trade war would continue to make these vape elements more expensive, since they’re imported from China. KushCo had been eating the costs of these price hikes rather than passing them onto its customers, and hurting its margins in the process. However, management recently noted that this will no longer be the case, with tariff costs now being passed onto customers. Given the strong demand for cannabis derivatives, it’s unlikely that these higher price points will deter consumers.
Finally, KushCo provides hydrocarbon gasses and solvents, which are respectively used in the making of cannabis oils and concentrates. Again, with derivatives being the go-to for the younger generation of cannabis users, KushCo’s hydrocarbon gas and solvent demand should be strong.
Considering that KushCo has already raised its full-year sales outlook once this year, it looks to be a price-to-sales bargain among a sea of pricey pot stocks…
Find out about the other 2 Top Marijuana Stocks for June at THE MOTLEY FOOL