Marijuana stocks are all the rage right now as investors get excited about Canada’s soon-to-be recreational market, which opens in a little less than three weeks.
And it’s no wonder why. Canada’s recreational marijuana market is expected to generate sales of around $5 billion per year, which will be a boon to marijuana stocks and is why many of these stocks have surged in the last several months.
And beyond that, total North American sales could reach $47 billion in the next decade, according to cannabis research firm ArcView, as legalization of the drug gains support in the U.S.
Big names in the space have seen massive gains in their share prices. The newly-IPO’d Tilray (NASDAQ: TLRY) is up 111% in the last month. Canopy Growth (NYSE: CGC) is up 109% year-to-date. And Aurora Cannabis (OTC: ACBFF; TSX: ACB.TO) is up just over 314% in the last year.
But while growers have had their time in the sun, investors may want to look to the ancillary cannabis industry for the next big winners.
One ancillary pot stock in particular has caught my eye.
U.S.-based KushCo Holdings (OTC: KSHB)—which was formerly known as Kush Bottles—is primarily known for providing packaging solutions to the marijuana industry.
Last week, KushCo announced its preliminary sales results for FY2018, reporting expected sales of $51 million for the year – a 171% increase over 2017. That comes after an increase of 129% in 2017 over 2016.
But compared to last year, KushCo is a massively different company. It is now firmly positioned in three distinct areas of the cannabis industry, all of which are experiencing massive growth, making that 171% sales increase look like just the beginning of the story for this stock.
Ahead of legalization, Health Canada put out a strict set of regulations for growers and retailers that they’ll need to comply to in order to get their products on store shelves. Packaging must be tamper- and child-proof, THC and CBD content must be noted on the packaging with standardized fonts and sizes, with limited space for brand names and logos, along with mandatory yellow health warning labels.
As the go-to provider of packaging to the pot industry, KushCo is in the business of keeping growers in the good graces of Health Canada and other regulatory bodies by complying to these packaging rules. And it already serves more than 5,000 pot companies worldwide.
But KushCo isn’t just packaging. With its recent acquisition of Zack Darling Creative Associates and its subsidiary, The Hybrid Creative, KushCo is now also in the business of providing branding, marketing, and e-commerce solutions to the marijuana industry.
Considering that there will be hundreds of products fighting for shelf space and shoppers eyes, KushCo will be in a powerful position to help its customers stand out from the rest with these new branding and marketing services. And once the branding is in place, KushCo can then produce the packaging, making the company a one-stop shop for marijuana producers.
KushCo has also recently expanded into the hydrocarbon gas and solvent space with its acquisition of Summit Innovations earlier this year. Hydrocarbon gasses are crucial to the production of cannabis oils, which are a popular and growing high-margin product segment in the medical marijuana space. Similarly, solvents are necessary for the production of cannabis concentrates which are expected to be made legal in Canada some time next year.
With a foothold in several niche operations in the marijuana sector, KushCo appears to be well-positioned to dominate when legalization goes into effect in Canada.
But the company isn’t stopping there. Last month KushCo announced that it was expanding its hydrocarbons and solvents business in the Pacific Northwest region of the U.S., as well as opening up a new warehouse facility in Massachusetts to serve as the company’s East Coast hub in order to address the growing demand in both regions.
As medical and recreational legalization measures are passed in states across the nation, being strategically positioned in large markets is likely to prove to be a smart move by the company.
The only hang-up with KushCo is that it is not yet profitable. It is setting itself up well in the long term by positioning itself in niche markets like packaging, branding, hydrocarbons, and solvents, but that hasn’t come cheap and the company is likely to see full-year losses in 2019 and potentially even into 2020.
But the company is reinvesting every dollar of positive operating cash flow back into building its business, which makes it an interesting investment in the cannabis space.