- California is about to legalize the sale of recreational marijuana, and Florida is doubling the number of legal growers in the state, setting up a huge new catalyst for stocks.
- Pure-play equipment supplier SLTK is uniquely positioned to sop up demand from cultivators with high-end grow lights and nutrient line, and could return multiples of the current stock price based on peers.
- Big investment funds are participating in cannabis through peripheral companies, like suppliers and real estate, and SLTK is poised to attract this new investment
New Laws Open Floodgates of New Business
Pot stocks are soaring as new states have continued to legalize marijuana. As more dispensaries and growers begin opening their doors in places like Nevada and Massachusetts - as well as countries like Canada - the opportunities to profit will become more and more limited as the mainstream catches on. But another catalyst is approaching, and with the potential for a floodgate of new business, a particular subset of cannabis stocks are especially well-positioned to create profits for traders this year as larger investment funds line up.
Last November, Florida constituents voted to allow the legal sale and use of medical cannabis in the state, and Florida legislators are coming up on a critical junction in that process that could open tremendous new business opportunities for some companies. After the vote, Florida legislators had 6 months to craft the law that would legalize medical marijuana, and 9 months, until October 3, to implement the law.
The October 3 deadline is approaching, and it sets up a big catalyst for companies that supply medical cannabis growers:
Florida will more than double the number of legal growers in the state from just 7 as of this summer, to 17. That's huge for the companies supplying the equipment and infrastructure to these growers as they will be larger than normal to handle demand.
As the third most populous state after California and Texas, Florida's legalization is a big win for the cannabis industry. By comparison, Colorado has about 6 million people living in the state, yet had over 700 marijuana growers as of this summer. Cannabis sales are spread out over these many providers, and most are smaller as a result.
But Florida's 20 million citizens will be purchasing all of their cannabis from just 17 cultivators - all of which must be large enough to handle this huge demand boom.
Meanwhile, California is scrambling to implement new laws that will legalize the sale of marijuana for recreational purposes. Last year, voters opted to legalize the use of recreational marijuana, but a framework for selling, dispensing and taxing the substance has been missing, with a January 2018 deadline for implementation.
With Florida bringing ten new growers online and California about to open the floodgates for recreational cannabis use, growers in each state will face a steep hill to meet this new demand boom, laying fertile ground for the companies that supply the equipment and nutrients for nursery growing.
Scotts Miracle-Gro (NYSE:SMG) has been preparing for this boom with their new Hawthorne Subsidiary which focuses on hydroponics, and the company has been making major acquisitions to build the business.
They’ve made especially significant investment in indoor lighting companies in the last 12 months. Last year, Scottsacquired a 75% economic interest in Netherlands-based indoor gardening lighting company Gavita for $136.2 million (an implied value of $181.6 million). In May, SMG tucked in another Netherlands-based greenhouse lighting provider, Agrolux Holding, for $21.8 million. This is part of SMG’s outlined long-term growth strategy to build out their hydroponics business, primarily, through acquisitions.
Here's just how important hydroponics is to Scott's: the company is in the middle of selling off its core consumer lawn and garden businesses in some major international regions (Australia, Germany, Poland and the United Kingdom, for instance) in order to invest $150 million in M&A. The message is clear - hydroponics and indoor gardening are an increasing focus. In fact, CEO Jim Hagedorn's son is running the new subsidiary.
Solistek (SLTK): A Little-Known Cannabis Stock With Big Potential
With all of the demand for indoor lighting, savvy investors have caught on to the fact that Solis Tek (OTCQB:SLTK) remains one of the few standalone U.S. companies equipping U.S. cannabis growers, meaning they're uniquely positioned to capture new demand. This emerging growth company provides a suite of products targeted at the commercial cannabis industry, anchored by their high-end grow-light business. The company had revenues of $8.5M in 2016, and gross profit was over $3M. Their lighting systems are some of the most respected in the industry, which shows in their increasing sales and selection as Dope Magazine's "Best Lighting Company" of 2016, and grow lights have the second largest share of the hydroponics equipment market after HVAC. It's a tremendous market size.
Understanding the changing dynamics of the cannabis growing industry this year, the potential for huge revenue growth in 2017 should not be underestimated. Even a small fraction of new cultivators in the U.S. utilizing Solis Tek's grow lights - in states like Florida and California - could equate to significant sales for Solis Tek.
The company just reported second quarter revenue of $2.44 million for the second quarter, a 15% increase over the second quarter of 2016, and the company is making some rapid expansions to round out their product offerings. Solis Tek just announced the release of the first product in a new Nutrient Line: an organically derived, commercial-grade essential oil intensifier called Terpenez. It's designed to naturally increase the terpene profile of the cannabis plant, and growers have already been making side-by-side comparisons in the last few months, with favorable results.
For the uninitiated, terpenes are the fragrant oils that give cannabis their strength and even aromatic diversity - like hints of lavendar or blueberry. This plays a major role in recreational marijuana sales and an increasing role in the medical marijuana industry. Terpenez is unique in that it does not contain cannabis-derived terpenes. Instead, it's made from natural components specifically formulated to assist the cannabis plant with oil and resin production for better, higher-yielding plants.
Solis Tek's nutrient line, anchored by Terpenez today, is aimed at helping growers increase their yield, lower costs and grow healthier plants. The agricultural nutrient sector is set to grow to $32 billion by 2026. SMG has specifically outlined lighting and nutrients as their focus for Hawthorne.
The roadmap is clear. Solis Tek is one of the only pure-play companies tapping into this huge new market, and the stock is positioned to benefit.
Investment Funds Looking for Easier Ways to Own Pot Stocks
Big players on Wall Street still have a hard time touching cannabis stocks. Even if they want to participate in this new boom, the fact that marijuana is still illegal on the federal level prohibits some funds from buying stock in these companies.It's sometimes written right into their bylaws.
But that's why peripheral suppliers like Scott's and Solis Tek are potentially so attractive. Investment funds may still be able to own these suppliers because they're not directly engaged in growing, transporting, or selling a federally illicit drug. Scotts Miracle-Gro has invested heavily in hydroponics, and the stock has benefitted immensely from new institutional shareholders riding the cannabis wave. SMG is up 156% in the last few years with a packed roster of hedge fund owners.
Investment funds are also participating in the industry by owning real estate associated with cannabis. Innovative Industrial Properties Inc (NYSE:IIPR), the first REIT that focuses on warehouses for regulated medical-use marijuana production, began trading on Dec. 1 of last year.
Investors are lining up to be first in line for this next wave of these arms-length marijuana stocks. And when investment funds start to buy in, they're forced to buy in big because it's the only way they can own a meaningful stake in a small company. If the company they're buying into is a penny stock...then share prices fly through the roof with large orders.
Take, for example, Novus Acquisition & Development Corp. (OTC: NDEV), a company that provides health insurance and medical plans to patients who pursue alternative treatment with medical marijuana. This was off most investors' radars until immediately after Colorado’s historic shift in marijuana legalization, when the stock exploded - by 4700% in less than one year. NDEV rode the wave of companies working on the periphery of the marijuana industry, and avoiding the pitfalls of handling a regulated substance.
With companies like Canopy Growth Corporation (TSX:WEED, OTCPINK:TWMJF) up 360% in two years and trading at a tremendous 30x multiple on their last twelve months of revenue, looking for the next undiscovered cannabis growth stock is a must for active investors. If SLTK was given the same multiple, its market capitalization would be around $300 million and the share price would be upwards of $8.00 - a more than 700% return if one were to buy the stock at today's prices.
Or consider Kush Bottles (OTCQB:KSHB), which at $109 million in market capitalization trades at more conservative 9 times their trailing twelve months of sales. SLTK moving in line with this peer, which sells the packaging and bottling for cannabis products, would be an easy double for the stock, to over $2.00.
The number of pure-play companies servicing cannabis growers and cultivators is dwindling, and once Florida takes multiple new cultivators online and California legalizes the sale of recreational marijuana, today’s marijuana supplier stocks could easily turn into tomorrow's blue-chip companies. With investment funds looking for better ways to participate in the boom, it doesn't take much for a surge in prices.
About One Equity Stocks
One Equity Stocks is a leading provider of research on publicly traded emerging growth companies. Our team is comprised of sophisticated financial professionals that strive to find the companies and management teams that will outperform the market and deliver investment returns to our subscribers. We are not a licensed broker dealer and do not publish investment advice and remind readers that investing involves considerable risk. One Equity Stocks encourages all readers to carefully review the SEC filings of any issuers we cover and consult with an investment professional before making any investment decisions. One Equity Stocks is a for profit business and is usually compensated for coverage of issuers. In the case of SLTK, we have been compensated $9,500 for Advisory Services and Expenses related to the provision of such services. One Equity Stocks and an affiliate also received 100,000 shares of SLTK restricted stock for advisory and business development related services. We may receive additional compensation in the future.
