Why NUGS is Interesting in the US Small-Cap Cannabis Growth Space
As the cannabis space continues to heal following the sector’s capitulatory cycle lows hit in March of this year after a devastating two-year bear market, the leadership that appears to be emerging among pot stocks suggests a growing bias toward US cannabis companies.
The evidence for this thesis abounds, with the likes of Curaleaf Holdings Inc (OTCMKTS:CURLF), Green Thumb Industries Inc (OTCMKTS:GTBIF), and Cresco Labs Inc (OTCMKTS:CRLBF) sharply outperforming the big Canadian names like Aurora Cannabis Inc (NYSE:ACB), Canopy Growth Corp (NYSE:CGC), and Tilray Inc (NASDAQ:TLRY) since the March lows.
That begs the question: where should one look for new small-cap growth opportunities in the space?
We would start that search with a close look at Cannabis Strategic Ventures (OTCMKTS:NUGS). NUGS has a market cap of less than $20 million and a forward sales expectation, according to the company’s recent release, of more than $11 million, suggesting that the stock is now trading at less than 2x in forward sales, further suggesting it is extremely cheap for a pot stock looking ahead to 1,000% sequential quarterly top-line growth – which the company has also foreshadowed in its recent communications.
Our research suggests that there are three separate factors at work driving the company’s sharp growth over recent months.
Turning Up the Volume
The first point is the company’s trend of expanding sales volume in pounds of cannabis as its distribution partnership network expands and the California cannabis macro context gets a boost. In terms of units heading out the door, the company has reported a powerful jump over recent months on a consistent basis.
Part of this is likely about the growth curve of a company increasingly well established in its marketplace. But there are also signs that the company has been more aggressive about production during a period when competitors may have cut back, anticipating demand shortfalls during the spring as the COVID-19 pandemic outbreak intensified. Cannabis Strategic Ventures appears to have doubled down during this period, which may have created stronger positioning in existing industry supply chains based on reliability. As it turned out, we saw a clear supply shortage in March and April in the California cannabis market, which would have possibly exacerbated this effect and granted NUGS an advantage in relationships.
In any case, the data is very clear: unit volume of cannabis sales at NUGS has skyrocketed.
The Price is Increasingly Right
The second factor is pricing. NUGS management noted in a recent release that the company has seen a jump in average price-per-unit sold from under industry benchmarks to as much as 11% over the average level seen across the space. This would appear to be a function of increasing quality and better operational execution at NUGS Farm.
“We have seen a steady improvement in per pound pricing driven by improving quality mostly as a consequence of better operational execution at NUGS Farm,” remarked Simon Yu, CEO of Cannabis Strategic Ventures. “It also represents another signal that we are heading in the right direction in terms of our core objectives: expanding production capacity, expanding sales volume, and expanding profitability on a per unit basis.”
The other big factor here is the company’s execution on the production side. As noted in a recent release, production capacity at NUGS Farm has been ramped by as much as 2.5x over the past couple months.
“We have sharply expanded our production capacity to take advantage of an extremely advantageous context,” noted Yu. “Pricing trends are very positive looking ahead over the spring and summer based on seasonal supply factors, demand growth is through the roof structurally and due to context-specific factors, and we are on the verge of launching our branded product line, which will significantly boost margins. Now is the time to expand output. Our team at the Farm has done a great job delivering on that objective.”
Management noted as well that NUGS has been carrying out strategic analysis and upgrades on a rolling 30-day basis to drive value for shareholders. Expanded capacity and output is a result of that process, which will continue going forward. The increase in capacity is anticipated to drive a doubling in revenue potential over coming months, which should come as no surprise as a basic arithmetic exercise in an environment powered by demand-driven growth in the region.
To keep the momentum going, Cannabis Strategic Ventures (OTCMKTS:NUGS) has started a next round of optimization that could drive further gains in pricing power, sales volume, and production capacity to finish out 2020 and in 2021.
To wit: the company announced last week that it has embarked on the process of scaling its current fleet of strains from eight down to four.
Cannabis Strategic Ventures currently grows eight top cannabis strains at NUGS Farm: Heavy OG, Sunday Driver, Ice Cream Cake, Super Glue, Purple Punch, Wedding Cake, Wedding Crashers, and Trifi Cookie. Based on upcoming data, including year-round harvest productivity, pricing standards, and integrated biological fitness given the precise ecology contextualizing NUGS Farm, that set will pared back to the four most efficient and effective, with the final determination to be made before September.
“We continue to drive powerful improvements in terms of execution,” stated Yu. “Different strains work best in different conditions. Our decision will be based on maximizing our productive yield capacity in terms of dollars. This is purely about shareholder value. We have the luxury of consistent production with some of the finest cannabis strains in the world. But our plan has always been to pare down to four optimal strains. We have already collected quite a bit of data. We will be ready to make this decision within the next 60 days or so. After that, both quantity and quality should be significantly further bolstered.”
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Published at Tue, 16 Jun 2020 03:25:12 +0000