A Profitable Picks-and-Shovels Play for the Cannabis Gold Rush

We are on the cusp of a cannabis gold rush in the U.S.

It’s not a matter of if — just when.

Perception is shifting.

Two-thirds of Americans support marijuana legalization today, according to a Pew Research poll, up from a third about a decade ago.

Demand is shifting.

According to student surveys from Monitor the Future, more U.S. high school students smoke weed on a daily basis than drink alcohol on a daily basis — and it’s not even close (6.4% to 1.7% among seniors), with the gap widening at an accelerating pace.

Laws are shifting.

Already 11 states plus Washington D.C. have fully legalized cannabis. Many more have legalized medical marijuana. Only 8 states representing less than 10% of the U.S. population have laws which strictly prohibit all cannabis — and many of those states were on track to strike those antiquated laws in 2020 before Covid-19 halted legislative meetings.

In other words, the writing is on the wall here.

Thanks to shifting perception, demand and laws, nationwide legalization of cannabis in the U.S. is coming soon — and when it does, it will spark a cannabis gold rush like we’ve never seen before.

Well… we have actually seen it before… back in 1849… during the actual Gold Rush.

During the original Gold Rush, it wasn’t the guys mining for gold which struck it rich — it was the people selling the picks and shovels to those miners who made out like bandits.

Same will be true in the cannabis gold rush…

Today’s trade is on a red-hot small-cap stock that is optimally positioned as a “picks-and-shovels” pure-play on the U.S. cannabis gold rush, and it could unlock huge gains over the next five-plus years.

A Go-To Convenience Store for Cannabis Growers

Back in 1849, fortunes were made selling picks and shovels to gold miners in California.

In the 2020s, fortunes will be made selling hydroponic and gardening equipment supplies to cannabis growers in the U.S.

But the hydroponics market today is not ready to supply what will be enormous cannabis growing demand over the next five to ten years.

There are only about 1,000 hydroponics stores in the U.S. The market is highly fragmented. There are no big brands. There’s zero consistency across markets. And online and omni-channel capabilities are limited.

Insert GrowGeneration (NASDAQ:GRWG) — a $780 million specialty hydroponics retail chain that is trying to consolidate, optimize, and modernize the cannabis growing supplies market.

Founded in 2014 in Colorado, GrowGeneration started out with a simple mission: turn into a modern, go-to convenience store for cannabis growers, where they can get everything from nutrients, to containers, to lighting.

The company has executed strongly against that mission over the past few years, growing its store base to 28 stores across 10 states today, and powering 470% sales growth from 2017 to 2019.

This growth trajectory is only accelerating. In 2020, GrowGeneration projects to grow revenues by another 120% to $185 million.

GrowGeneration isn’t powering all this growth by just randomly opening hydroponics stores across the country.

Management is being very strategic about expansion.

They are only opening stores in advanced, developed cannabis markets — like California, Colorado, and Michigan — so as to sustain strong unit volumes and margins…

It’s working. Same store sales rose 49% last quarter. Store-level operating margins were up nearly 200 basis points.

Management is also building out a robust e-commerce platform at GrowGen.Pro, and adding omni-channel capabilities to each store, so as to ensure unmatched shopper convenience…

That’s working, too. Online sales rose 149% last quarter.

And management is building out a private-label brand — Sunleaves, which launched in late 2019 — so as to create product and inventory consistency across markets, and improve margins…

You guessed it. This is working, too. Less than a year old, the Sunleaves brand is already doing about $100,000 in sales per month.

In other words, GrowGeneration is in the early stages of building the perfect convenience store for cannabis growers, complete with wide reach, multiple sales channels, and tons of recognizable product.

If management can successfully scale this into a national brand, the potential upside in GrowGeneration stock is enormous.

We have a $780 million company today. Assuming the company can grow to around 200 stores by the end of the decade, maintain solid unit volumes, and expand profit margins thanks to private-label sales, my numbers say this could easily be a $1.4 billion revenue business with 15%+ EBITDA margins and $175 million in net profits.

Home improvement retail stocks typically trade around 20X forward earnings. A 20X multiple on $175 million implies a potential future valuation for GrowGeneration of $3.5 BILLION.

And it doesn’t include any expansion into Canada or overseas — which could easily double or triple the size of the business.

To that end, GrowGeneration is a compelling “picks-and-shovels” pure-play on the cannabis gold rush — with explosive enough upside potential that you may want to consider taking a position in GrowGeneration stock today.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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Article printed from InvestorPlace Media, https://investorplace.com/2020/09/a-profitable-picks-and-shovels-play-for-the-cannabis-gold-rush/.

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