Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2022 contest. Thomas Yeung’s pick for the contest is POSaBIT (OTCMKTS:POSAF) stock.
Investors should have cheered when my pick for the best stocks of 2022, POSaBIT Systems (OTCMKTS:POSAF), announced earnings on Aug. 25. Revenues of $8.2 million were up 66% year over year and the company raised its full-year gross profit guidance to between $9.5 million and $10 million.
“We successfully on-boarded more than 100 locations in the second quarter,” CEO and co-founder Ryan Hamlin said, “and now have more than 500 merchant contracts that are leveraging our solutions.”
Ordinarily, these “beat and raise” reports send stocks soaring. The only thing Wall Street likes more than good earnings these days are the promise of more good earnings down the road.
But my entry for the best stocks of 2022 has disappointed in a major way. Despite blowout earnings and positive news, shares of the cannabis financial firm have slumped 65% this year. The over-the-counter firm now trade at 1.75x sales, pricing POSaBIT at a third of other point-of-sale companies like Fidelity National Information Services (NYSE:FIS) and a tenth of payment firms like Visa (NYSE:V). (Fortunately, my No. 2 pick would get bought at a 100% premium).
Among my list of 10 stocks that could rise 10x (safely), POSaBIT is now the cheapest on an industry-relative basis.
A Promising Stock in a Terrible Market
POSaBIT’s shares have fallen on a combination of investor de-risking and cannabis market issues.
Consider the first element: investor de-risking.
Unexpected inflation and rising rates have punished shares this year in a way few predicted. Today, 361 companies on America’s three main exchanges trade for negative enterprise value, meaning that the firm’s cash is worth more than its market value. These factors will ease as the U.S. Federal Reserve slows the pace of rate rises.
The second factor – cannabis issues – is more worrying.
“The cannabis industry is in a full-on downturn,” Jeremy Berke of Business Insider wrote in an update this month. “Legal cannabis sales have slowed down in states like California and Colorado as consumers feel the pinch of inflation.”
The illicit marijuana market has also hurt the legal industry, which pays taxes to local and state governments. A study by California’s United Cannabis Business Association found that almost 90% of licensed dispensaries in 2017 had closed by 2022.
Though POSaBIT will eventually come out ahead, these short-term headwinds have scared investors about the company’s near-term growth.
Should You Buy POSaBIT Stock?
None of this will comfort investors in POSaBIT, a stock that’s underperformed the Nasdaq index by almost 30% this year. When shares are down by twice the index, it’s easy to worry about holding the bag.
But POSaBIT’s underlying business continues to power along. On Sept. 20, the firm entered the Illinois market.
“Launching our system in Illinois was a major goal for us this year and we are proud to have achieved it,” Mr. Hamlin said. “We are riding a wave of increased momentum and the results speak for themselves.”
The point-of-sale company also continues to grow revenues faster than costs. In Q2, selling and general expenses (SG&A) decreased despite a 28% sequential increase in gross profits. At that rate, the firm could reach profitability by 2024. As I mentioned in my initial write-up of the company:
“POSaBIT operates … a lucrative business with few traditional competitors … Marijuana remains a Schedule 1 substance under federal laws, preventing most publicly traded companies from breaking in.”
Ignoring the valuation noise, I expect the company could be worth $5 by 2024… a modest price that still values POSaBIT under $300 million. It could be worth as much as $10 within several years if it succeeds.
Best Stocks: The Bottom Line on POSAF
Still, any investor should continue to exercise caution.
“We all know that penny stock investing is risky at best,” I also warned in my original piece. “That means investing in my top penny stock pick for 2022 should still be done with a measure of restraint. Even though POSaBIT now holds a 5x return potential, investors should only tip-toe back into the stock with cash they can stand to lose.”
With shares down to 50 cents, the same is true as ever. POSaBIT remains a top pick, but tread lightly in the wild world of over-the-counter penny stocks, no matter how cheap they become.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
Read More: Penny Stocks — How to Profit Without Getting Scammed
Tom Yeung is a market analyst and portfolio manager of the Omnia Portfolio, the highest-tier subscription at InvestorPlace. He is the former editor of Tom Yeung’s Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad.