Quite a few of the major multi-state operators in the cannabis sector have been reporting earnings this week. While the reports have been quite strong, traders are disappointed by the lackluster responses in many cases. The problem for the group is that legislation for the decriminalization of pot is advancing very slowly, and more importantly, SAFE banking, which will allow for full Nasdaq listing or these stocks, is not progressing at all.
As long as U.S. cannabis plays are unable to be fully listed and are handicapped in their dealings with banks, the demand for these stocks will be suppressed. Good fundamentals are not enough to offset the issue.
One solution to this problem is to focus on the ancillary plays that don't directly sell cannabis. These stocks can be fully listed and don't have the legal hurdles of the MSO names.
A couple that have already done extremely well are Agrify (AGFY) and GrowGeneration (GRWG) , which focus primarily on selling equipment that is used for growing cannabis. These names have been popular for a while.
There is another company that I discussed on July 20 that I believe will be the next big mover in the ancillary pot plays. It is Urban-Gro, Inc. (UGRO) . UGRO is a fully integrated architectural, engineering, and cultivation integration company for commercial cannabis and food-focused Controlled Environment Agriculture (CEA).
The company announced earnings on Wednesday night. Revenues grew 220% to $12.8 million over last year, it has its first profitable quarter, its backlog of business is a record $27.9 million, and it has $50 million in cash.
The company only has 10.9 million shares outstanding, so that is nearly $5 per share in cash. The company guided revenue to between $54 and $59 million, which sounds low, but based on those numbers and excluding cash -- the stock is trading at close to 1 times annual revenue, which is quite attractive for a stock with substantial growth.
This is a very small company and is under the radar, but it is expanding into Europe and has already made one accretive acquisition. I believe it should do well as the cannabis market continues to develop.
