Quite possibly one of the most underappreciated cannabis stocks in 2020 is Sugarmade Inc (OTCMKTS:SGMD), a rapidly growing force in California’s vertically integrated cannabis space.
The company has become a leader in the cannabis delivery marketplace and is quickly working to glom together an internal vertical that solves costs associated with supply chain dynamics in an industry that penalizes companies unable to fuse cost structures to a vertical supply solution. Based on recent company communications, we could see coming announcements that present such a solution.
However, the big story here is how the company has evolved over the past 12 months, and where it may be headed in 2021.
Revolutionary Growth
Sugarmade Inc (OTCMKTS:SGMD) had a banner year of growth that was perhaps wildly underestimated by the markets due to a lack of recognition of the performance in play for the company.
SGMD’s landmark investment in Budcars to start the year appears to have paid off in spades, with massive growth on a month-over-month and quarter-over-quarter basis throughout 2020 as end-market solutions were called into action by the pandemic health crisis due to consumers’ lack of easy or preferential access to in-store cannabis dispensaries.
BudCars is a cannabis delivery service in which SGMD holds a 40% stake with powerful operational control, and the ability to gain an additional 30% to take a financial controlling interest if it should choose to exercise the option. So far, we have seen sales growth producing a ramp from nothing to an annual run-rate close to $7 million on the top line from one location over just three months.
And its margins, which have been upwards of 60%, could expand further based on the company’s plans to vertically integrate.
Verticalization
The vertical integration process is key for Sugarmade Inc (OTCMKTS:SGMD) at this point. Verticalizing its supply chain can introduce wider margins and critical efficiencies driven by basic cost and tax-related themes.
As in any other industry, no other company is going to give you the same price you would give yourself. Hence, once you have access to a large piece of the end-market consumer equation, vertically integrating your sourcing process can pay off in a big way.
So far, based on company communications, we can likely expect to see messaging from the company that echoes this idea. It’s 101. Why pay $X/unit when you can pay ($X-1)/unit and get the same quality as a sourced input? Once the scale is in place, along with the top-to-bottom know-how, the process becomes inevitable.
That’s why it hasn’t come as a surprise to see the company’s recent communications reflect this basic theme. And we would expect more of the same to kick off 2021.
The Big Story
All of this is wrapped up in one of the big three speculative stories driving the market as we head into a new year: cannabis, electric vehicles, and bitcoin. These are the three market themes producing the biggest results for market participants.
Sugarmade Inc (OTCMKTS:SGMD) is right in the mix. But the stock hasn’t been discovered by momentum traders (yet), which could change as we see more concrete details emerge on its plans going forward and more traders and investors get to know the story.
The big driver of the cannabis stock story is legislative, with more states recently voting to accept cannabis as a basic consumer right this past November. At this point, the enthusiasm for this product category transcends party lines with both red and blue states moving in that direction.
That gives you a pretty good idea of where things are headed. The firewall has been burnt to the ground. The inevitable direction is emerging in striking fashion – in the past three votes, the consensus of the American voter is undeniable: weed legality is ascending fast.
That creates a major tailwind for the cannabis space. Many stocks in that space have already taken off. SGMD hasn’t yet been discovered by the crowd. But the pieces are in place, as far as we can tell.
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