If you haven’t come across Cannabis Strategic Ventures (OTCMKTS:NUGS) before, then the title may not make sense. The point here is to suggest that NUGS – a premium cannabis producer with a high-capacity greenhouse production facility in Northern California – is a sort of quintessential marker of where we are in the cycle for cannabis stock investors.
The moment contrasts powerfully to where we were in September 2018 – a time characterized by its poster-boy, Tilray (TLRY), which moved from $20/share to $300/share in a matter of weeks on no real business edge and an astonishing problem looming in terms of debt-servicing to maintain an insanely shaky balance sheet crisis.
By contrast, today, the poster boy is NUGS. Despite demonstrating all the hallmarks of a growth juggernaut doing everything right and backing it up by constant substantive data updates, NUGS has been tracking sideways at $0.08/share.
The key insight here is not about these snapshots. It’s about what they suggest may be coming next. In September 2018, the next move for TLRY shares was a crash and a gradual grinding bear trend that took the stock 99% lower over the following 18 months.
By contrast, will we see the diametric opposite unfold for NUGS?
Valuation
One way to think about this question is by forward price-to-sales valuations. In late 2018, TLRY was trading at roughly 90x forward sales. That’s utterly absurd for an unproven company in a legally risky industry. Heck, that’s absurd for a 1999 dotcom stock.
By sharp contrast, right now, NUGS is trading at about 1x forward sales if we extrapolate the company’s performance over the past three months out for the next year. That’s absurd in the other direction given that it is operating in the same industry, which has analyst growth estimates largely anchored at strong 5-10 year tracks.
Helping to further back this up, the company just hit the wires this morning with the announcement that it closed out the month of June with continued sales momentum, posting its second best week in company history, with over $550,000 in sales of cannabis products (an annualized pace of better than $28 million).
This comes on a market cap of just around $20 million (in contrast to Tilray’s $14.4 billion cap in September 2018 when it was poised to only do about 4x NUGS projected sales over its coming 12 months). Imagine NUGS shares rallying from here to about $15/share in the next few weeks if you want to think about what would make it comparable to where TLRY shares were trading back then – a mere 17,900% rally.
That difference is the difference we have right now in the sentiment environment for cannabis stocks. We are at a very different phase of the cycle. And we sit here in the aftermath of a capitulatory bottoming event (in March), meaning that the path ahead could very well be a gradual trek higher eventually leading to excesses that mirror what we saw a few years ago.
“It’s no surprise that we keep setting or closing in on new record sales numbers for days, weeks, months,” noted Simon Yu, CEO of Cannabis Strategic Ventures. “It’s hard to imagine that we won’t see this continue in July, August, and beyond. This is the product of better production practices, better products, expanded production capacity, and better positioning in our relationships with California distributors. We are very well-positioned for continued growth as we head into an exciting second half of 2020.”
The Context
One false narrative that distracts from this analytic process is the pandemic. Some analysts have suggested an intensification of the pandemic’s grip on consumers – particularly in California – will stamp out the nascent bull in the cannabis patch.
However, data says otherwise. And Cannabis Strategic Ventures (OTCMKTS:NUGS) addresses this very well in its most recent release.
As noted there, NUGS does not anticipate headwinds from the recent surge in COVID-19 cases in California. Management notes that the surge in cases in March and April led many observers to forecast demand challenges in the cannabis market, which drove widespread reductions in headcount and production activity by cannabis cultivators. Cannabis Strategic Ventures did not reduce production during this period, which turned out to be a beneficial strategic decision for shareholders as demand strengthened and Californians faced rising prices and cannabis supply shortages in May and June.
As far as we can tell, that makes two important points. First, an intensification of the Covid pandemic doesn’t seem to undermine demand for cannabis. And second, Cannabis Strategic Ventures seems to be better equipped, for whatever reason, to understand its strategic reality in variable business environments, including a once-in-a-lifetime virus crisis.
Both seem to bode well.
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