To get a massive return out of an investment often requires taking a greater-than-average risk, such as by purchasing a stock that isn’t widely appreciated on Wall Street. Investing in such obscure or unpopular companies can be scary, but in a hot industry like cannabis, time can be on your side.
For example, Village Farms International (NASDAQ:VFF) and Planet 13 Holdings (OTC:PLNH.F) each still trade at less than $10 per share. Both appear primed for rapid growth over the next few years, but despite their merits, neither has gotten the recognition that they deserve — yet.
1. Village Farms
Village Farms International has the potential to be a cannabis colossus. Most people know the business for its non-cannabis products like tomatoes, cucumbers, and peppers, all of which it grows in its greenhouses across the U.S. and Canada. But since it acquired Canadian cannabis cultivator Pure Sunfarms in November 2020, its focus has shifted.
While it’s too soon to know how the acquisition will pan out, the premise is that Village Farms will be able to leverage its expertise in indoor growing to supercharge the efficiency and scale of its new marijuana operations. So far, so good. In the first quarter, revenue shot up 63.2% year over year, driven largely by the addition of $17.4 million in cannabis sales. And compared to Q1 2020, Pure Sunfarms brought in 43% more in revenue.
After an earnings report like that, it might be hard to believe that the stock didn’t explode. But there’s a reason why Village Farms is still a diamond in the rough. Even with its new cannabis business, its overall profitability is extremely tenuous, with a net margin of 0.02%. In short, greenhouses are expensive to operate, and the company assumes (based on its extensive experience) that its products will, on average, sell at prices that make up for the added expense.
Amidst the chaos of 2020, that assumption didn’t hold up. Tomato prices quickly slid to lows that eroded Village Farms’ gross margins. As tomato prices revive, expect the company’s profit margin to come bouncing back too. At that time, its revenue growth from cannabis sales could make its stock quite mouth-watering to investors.
2. Planet 13
Whereas Village Farms’ competitive advantage stems from its knowhow with greenhouses, Planet 13 Holdings’ (OTC:PLNH.F) competitive advantage is a matter of location. Its most important asset is a retail superstore located smack-dab in the center of Las Vegas. More than 1 million visitors passed through the doors of that single store in 2019, when it accounted for 9% of the cannabis sales in the entire state of Nevada. The company has brought in $77.5 million in revenue over the past 12 months, and its late-2020 expansion to another dispensary location in Nevada helped to drive revenue growth of 41.8% in the first quarter.
Unlike other cannabis retailers, Planet 13 aims to make the trip to the dispensary into an entertaining experience of its own. In service of that goal, its superstores will feature cafes and interactive art installations, not to mention a plethora of aesthetic factors that make up its characteristically energetic ambiance.
To power future returns, management rightfully assumes that it will need to look beyond Nevada’s borders for new opportunities, and the goal is to have at least eight new superstores in operation before 2026. But not every market is a good fit for Planet 13. The company is targeting the upper tier of the cannabis market, so it will only open new locations in places with enough wealthy consumers to support its business model.
This in part explains why some investors might be unimpressed with Planet 13 — so far, it hasn’t proven itself outside of Las Vegas, where it costs next to nothing to find a constant stream of customers ready to pay a premium for a unique cannabis purchasing experience.
In light of all this, the company’s decision to open a new superstore in Santa Ana, Calif., may be justifiably viewed with a little skepticism. Orange County isn’t exactly jam-packed with free-spending tourists, and the retail cannabis market in California is crowded. The new location opened in late June, so it’ll be awhile before shareholders will have a full picture of the store’s performance over a full quarter. If Planet 13 knocks revenue expectations out of the park, it’ll be a strong sign that it’s a good purchase for long-term growth.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/08/05/2-diamond-in-the-rough-pot-stocks-you-can-buy-for/