One is wise to focus on one pivotal fact about a publicly traded almost more than any other: does it overpromise and underdeliver, or does it underpromise and overdeliver?
If you search through the annals of stock market history, you will find that companies tend to fall into one or the other of these camps, and the evidence suggests that the latter camp is where nearly all of the big returns reside. It should be obvious if you stop and think about it. The latter camp is how you would act if you actually held all the cards. The former camp is full of companies that don’t have the goods, but still want people to think they do.
It’s bluffers versus inside buyers.
Jesse Livermore talked about it in Reminiscences of a Stock Operator, one of the greatest investing books ever written. His main point there was to note that companies destined for huge growth ahead would often downplay expectations to allow for plenty of time to get friends, neighbors, management, insiders, and spouses into the action before the crowd knew the big boom was underway.
While markets no doubt work differently today than they did 100-plus years ago, the concept is still operative on some level: the best companies almost always underpromise and overdeliver.
And such a point transitions us to a discussion about Sugarmade Inc (OTCMKTS:SGMD), a recently strong micro-cap stock in the high-growth cannabis market. The company has gained strong traction since taking a controlling stake in BudCars, a leading California cannabis delivery company that operates on a traditional retail model with consistent 45-50% gross margins on cannabis inventory.
Since Sugarmade took over control of operations, the outfit has posted an almost astonishing pace of 10% week-over-week sales growth. This has further reared up in the company’s most recent release, featuring guidance for its calendar Q3.
The New Word
According to the company’s most recent release, based on robust growth and underlying data trends witnessed in May and June, and continued very strong performance underway so far in July, management now forecasts continued month-over-month sequential sales growth of 30% in July and August, positioning the company for July sales of at least $650K, and a pace lined up to close out September with annualized BudCars revenues running at or above $11 million.
Hence, the company’s most recent data covering its June performance suggests closer to $25-30 million in annualized revenue pace by year-end than $15 million. If you do the math from the numbers given, we are looking at gargantuan m/m and q/q topline and gross profit growth continuing in July and beyond as BudCars continues to ramp higher.
Jimmy Chan, CEO of Sugarmade, noted, “We believe we have enough visibility and enough data in hand to forecast that we will continue to see extremely robust growth in July and August. Many of the trends we saw come together in June to drive our performance remain in place and suggest new records across many metrics are likely this month as well.”
Pushing Bottom Up
When SGMD shares took off a month ago, the stock’s initial pop followed a few days after the company gave a monthly performance update for May, showing record growth data for BudCars sales during the month, featuring nearly 30% sequential monthly growth over April sales. It also noted in that release that it continues to see week-over-week sales growth at 10%, suggesting that BudCars will surpass $10 million in annualized sales by the month of August at its Sacramento location.
The stock started to advance a few days later
Then, after pushing up about 50% in three days on growing volume, the company announced that this wasn’t just a topline revenue pop. It was also seeing record growth in gross profits and gross profit margins for BudCars sales during the month of May (up 46% on a sequential month-over-month basis), and continued strong signals so far during the first half of June, with gross profits growing 9.9% on a week-over-week basis.
“As we gear up to open our first new hub in the Los Angeles regional market, we continue to see very good signs from our Sacramento hub, with the very rapid topline growth clearly translating to the bottom line as margins hold up and even improve,” commented Jimmy Chan, CEO of Sugarmade. “As we recently reiterated, BudCars is not a delivery business comparable to GrubHub or Uber Eats. It is a top cannabis retail business with very consistent 46-52% gross margins on a wholesale inventory with very secure logistical underpinnings. This differentiation has been a source of misunderstanding, and it is critical to fully appreciating our value proposition and our strategy as a Company moving forward.”
This suggests the big motivating factor here was the understanding, getting under the skin of the market, that this was more than just a delivery fee outfit. This is a strong-margin retail play in a fast-growing space.
BudCars saw improvement in every major data point last month, which featured mutually reinforcing trends in increasing new customers, strong repeat business, increasing orders per customer per period, and increasing ticket sizes continue to define performance thus far in July, suggesting a high degree of confidence in continued 30% sequential monthly topline growth and the likelihood that the Company will close out its calendar Q3 with extremely strong metrics in place heading into year-end.
That lines up well with its track record. Sugarmade Inc (OTCMKTS:SGMD) management gave guidance about its new subsidiary back in March as well, suggesting then that it might be capable of as much as $15 million in annualized revenues. At the time, this likely seemed like “pie in the sky” guidance for a company that wasn’t pulling in a fraction of those sales in the prior 12 months.
It is now on pace for nearly twice that just a few months later.
Now, here we are again, with the company putting out big upside numbers. But, if you examine the standing growth curve, on a second-derivative basis, it adds up that this may also be a sandbag. Just because the numbers are impressive doesn’t mean the company soar over the bar when we get to September.
After all, that’s the track record in play at this point.
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