Why Some Cannabis Stocks Are Still Poised For Big Upside

- Big stock valuations in the cannabis industry mirror the big market potential over the coming years.

- Companies like MSRT and MCIG have big valuations for their current sales, and companies like SLTK are poised to play catchup in a big, big way.

Few companies are better-positioned in 2017 for a new secular tailwind than companies in the marijuana industry. With an estimated $46 billion in illicit sales last year in the United States, and only $7 billion in legal sales (on the state level), this huge $39 bln gap is where investors are finding profitable places to put money to work. Many analysts believe the market will reach $25 billion within four years. Amazingly, Cowen & Co put the market at $50 billion by 2026.

The Long Road To Profits With Cannabis-Based Drug Companies

Some companies have chosen to focus on commercializing marijuana and its derivatives through the drug development process. Companies like GW Pharmaceuticals (NASDAQ:GWPH), Insys Therapeutics (NASDAQ:INSY) and Zynerba (NASDAQ:ZYNE), for instance, have focused on developing cannabinoid-based medicines that will be regulated by national healthcare agencies like the FDA and EMA in Europe. Developing a drug from the laboratory all the way to getting in front of these regulators can take years - but of course, these companies can charge high prices for their prescription products if ever approved.

That process can be hit or miss. For GWPH investors, the drug-development approach has been a profitable one. In less than five years the stock has gained 1070%, though not without some ups and downs. On the other side of the coin is ZYNE. This stock has been crushed in the last month with the high-profile failure of its gel cannabidiol product, ZYN002, in two studies this summer. The stock has already lost 70% of its value since going public in 2016.

The real downside, however, is that these medical companies are widely known among both retail and professional investors. There are few surprises due to the number of analysts covering these companies, and when there are surprises…they aren’t all great. ZYNE’s trial failures and subsequent stock losses are a perfect example of the risk involved in trying to take a substance like marijuana through the long and expensive drug development process.

Why The Cannabis Industry Deserves Growth Valuations

Marijuana legalization in states like California - where legalization will imminently be broad and sweeping - and Canada will undoubtedly lead to growth of this industry in the next year. But investors looking to profit from this new wave have few high-quality established companies from which to choose. The few companies that have staying power, like Scotts Miracle Gro (NYSE:SMG), are already close to fairly valued based on their fundamentals, or have already benefitted from investor interest and may even be over-valued.

But growing cannabis companies deserve growth multiples. Companies like MCIG Group Inc (OTCQB:MCIG) are trading at compelling multiples of their revenue. MCIG is a distributor of products and services for the medical cannabis industry, like contract growing facilities and packaging & dispensary supplies to downstream companies in the retail space. MCIG even provides merchant processing and payment solutions specifically to cannabis businesses and dispensaries. MCIG did $4.5 million in fiscal 2017 revenue, and the company is valued at $70 million, or about 15x annual sales.

With a $45 million market capitalization, Massroots Inc (MSRT) has built a social media platform that allows users to rate and share their cannabis content and follow their favorite dispensaries. They also distribute point-of-sale and web-based inventory tracking and compliance software for cannabis retailers and cultivators. With less than $1 million in sales over the last 12 months, investors have high expectations for the future of this emerging company and are willing to pay a more than 40x premium on recent sales figures based on today's stock price.

Also turning heads recently is Sunset Island Group, Inc (OTCQB:SIGO), which is establishing a cannabis growing facility in California. The stock rallied from $0.10 to $2.10 in the last two months - a 2000% gain - as the company made a few unique announcements - for instance, locking up 90% of their outstanding shares. Their 22,000 sq. ft. leased green house space in Northern California has been approved for cultivation, and the company is considering further expansion as they prepare to begin generating revenue in the coming year.

A Little-Known Standout With Huge Potential Upside

There are still some small companies that have yet to be discovered by Wall Street. Solistek (OTCQB:SLTK) could be one of these exceptions, and this stock may offer triple-digit upside to investors should the company continue to grow revenue as the marijuana industry takes off, and if investors start to take notice of this undiscovered name.

Solis Tek provides high quality lighting equipment and supportive nutrients to the marijuana industry, with revenues of $8.5 million last year. Gross profit was over $3 million, and the company just announced that revenue in the second quarter of this year grew a rapid 15% over the same quarter in 2016. Their products are sold by over 500 re-sellers in the U.S., Canada, and parts of Europe, and the company even won Dope Magazine's Best Lighting Company Award in 2016. SLTK's management own about 75% of the company's stock, which means they are highly incentivized to maximize value to shareholders - themselves included.

Here's what makes it a standout - while the above companies are trading at high multiples of their recent sales figures, SLTK is still undiscovered. Applying a 15x sales multiple to SLTK’s $8.5 million in 2016 revenue, like that of MCIG, would imply a potential share price of $3.40 if the market started to pick up on this price disparity.

Discovering price disparities is exactly how smart traders make their profit, and we think SLTK's execution in 2017 could justify major price appreciation as Wall Street picks up on this supplier.

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 100,000 shares of SLTK restricted stock for advisory and business development related services. We may receive additional compensation in the future.