To build a dynamite cannabis stock portfolio, you need exposure to quality marijuana producers, distributors, and investment companies like the ones we talk about all the time.
That way, you’re in the best possible position to cash in on a trend that could be worth as much as $20 billion by 2020.
But there are some under-the-radar “back doors” to cannabis investing that often go overlooked by investors and the media alike.
These are plays that might not deal directly with marijuana plants or products, but which are nonetheless connected in one or more ways to the sector.
These back doors can throw off extreme profits indeed, and I want to show you one of my favorites…
Rushing to Fill a Huge Service Gap
As we’ve talked about before, banking remains a huge obstacle to growth in the U.S. cannabis sector.
Even in states where medical and/or recreational marijuana is completely legal, weed businesses are frozen out of banking because of federal laws. The instant those marijuana proceeds cross state lines (as they inevitably must in the modern U.S. banking system), the parties involved become liable to federal money laundering charges.
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Commercial bankers, a risk-averse bunch, would rather not, and so generally refuse to service cannabis-related accounts.
One Annapolis, Md.-based regional bank is looking to step into the breech and offer badly-needed banking services to the state’s many medical cannabis businesses.
The company I’m talking about is Severn Bancorp Inc. (Nasdaq: SVBI).
Severn has been growing quickly after spending several years recovering from the financial crisis. Year-over-year growth in assets increased from just 2% in 2017 to 20.7% in 2018, with much of that growth in the second half of the year. Deposits showed a similar growth, from 5.3% in 2017 to 29.4% in 2018, mostly in the second half of the year once again.
Severn’s generally excellent management has put that money to work profitably, increasing return on equity from 3.1% in 2017 to a more respectable 9% in 2018.
A big part of that was through controlling operating expenses. The bank’s efficiency ratio (lower is better) is the lowest it has been since 2012. From an operating point of view, that makes Severn a more desirable bank than it was just a few quarters ago. The company also now has a full year of stable dividend payments under its belt, after suspending dividends from 2009 to 2018. It’s currently paying 1.38%.
Rising interest rates were a concern with this bank; the common wisdom that rising rates benefit banks is a lot less true of smaller regionals. But at this point, it’s fairly certain that the Fed won’t be hiking rates anytime soon.
That means Severn can continue to grow and profit without fear that rising rates will hurt the demand for the loans that are powering its growth.
Severn Is Riding a Boom in Bank Consolidation
Analysts and many economists have been calling for larger banks to buy smaller ones for some time now, and it is finally beginning to happen.
There’s no secret reason: Regional banks want to become larger, and they’re buying one another, and smaller banks, too.
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This is a consumer-driven trend. Consumers demand advanced services like mobile banking, fast mortgage turnarounds, and instant, personalized customer service. The technology behind all those services is expensive, and smaller banks have a hard time keeping up.
Severn is a logical consolidation candidate. It boasts of only six branches, but that gives it a large market share in one of America’s wealthiest jurisdictions – Anne Arundel County, Md.
I’d expect any acquisition offer to come with a double-digit goodwill premium to today’s share price of $8.50, the better to sweeten the pot for shareholders.
And that brings us to the cannabis business.
Severn’s Bold Cannabis Move
Cannabis has been a big part of the turnaround story at Severn, particularly when it comes to profit growth.
Cannabis-related deposits and loans were around 2% of Severn’s total deposits and loans as of early 2019.
But, significantly, cannabis companies also provided 16% of Severn’s non-interest income. Fees are very high in the cannabis industry, and this Maryland bank will continue to profit from them.
Now, Severn has been caught up in the broader sell-off of stocks, despite the fact of its relative isolation from the global trade tensions responsible for that sell-off.
Nevertheless, given the fact that those clouds seem to be lifting, I project the stock to make a run at $9.80 per share fairly soon.
Not bad for a potential quick buck, but the long-term potential is even better…
As Severn cements its uniquely profitable position, the company should bump up to near its all-time high of $21.14 per share, a level not seen since before the financial crisis. That would be a potential gain of more than 140%.
America’s Green Gold Rush Is Just Getting Started – Claim Your Stake Now
At this very moment, big investment firms and members of the Fortune 500 are building enormous war chests.
They’re preparing to push billions upon billions of dollars into the cannabis market – and they could strike at any moment. So right here – right now – you have a once-in-a-lifetime opportunity to beat them to the punch and stake your claim.
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