Investors are taught to diversify. How you apply it is up to you, but it makes logical sense. Don't put all your eggs in one basket. Spread out your risk.
We preach it for individuals, but the concept has somewhat died with companies. The idea of a conglomerate is mostly dead. Thanks, General Electric (GE) .
Some still exist. Heck, one could argue Amazon (AMZN) or Microsoft (MSFT) are heading down that path with their growing diverse revenue streams, but for the most part, we want a company to do something and do it well, but what if companies aren't thinking far enough outside the box?
GE went and leveraged its strengths to expand and grow. Leverage is a serrated double-edged curved blade that can do a lot of damage if you're not careful. GE wasn't careful, but I would love to see the idea of real diversification happen within a few companies, not to the scale of a conglomerate, but more along the lines of creating a real business unicorn. A company that is nothing more than a mirror image of the competitors in its sector.
It speaks to the idea of a core-and-explore portfolio for investors. That would be something like a handful of large index exchange-traded funds (think S&P 500, Nasdaq 100, and Russell 2000) with an aggressive ETF-like emerging markets or robotics or biotech or solar. It's a swing for the fences with a small part of your portfolio while maintaining what you know won't kill you in the long term as the bulk of what you hold.
I don't understand why some companies don't adopt to this approach. For instance, if you are a low growth company with strong, stable cash flow, the best you tend to offer investors is a dividend. But if I'm debt-free, profitable, and have strong free cash flow but stagnant growth, why not consider some outside-the-box thinking? Why not take a shot at growth with some of that cash flow rather than boosting your dividend from 1.5% to 2%? Roll the dice on a small stake in an emerging growth company, a tech company, a biotech company, or something very different from your own industry? I'm not talking about using cash, but using cash flow.
We've actually seen this in reverse. Broadcom (AVGO) has been acquiring businesses with low growth, but strong and consistent cash flow over the past few years. Their acquisitions have had something in common with their core, but they have branched across hardware and software, which took them beyond their core.
This could work, especially for companies that could use shares rather than cash to expand or stabilize their business. Let's look at cannabis for instance. I studied the New Age Beverage deal last night and appreciate where their intentions were on their deal; however, I look at a company like Alkaline Water Company (WTER) and think there are several cannabis names that could benefit from a combination. I might be looking at you on this one Village Farms (VFF) .
Alkaline Water Company had its own bumps with a buyout of a smaller competitor that never materialized, but since that time the company has gotten back on track. They just reported revenue growth of 52% year-over-year for Q4, have a national footprint of 70,000 retail locations and continue to post record growth month-over-month. Although they aren't profitable, they are close. A little consolidation and that becomes a net while gross profits are already attractive.
Imagine if the up and down business of cannabis were able to add $40 million, $50 million, or even $60 million of consistent annual revenue and free cash flow along with a stable of ready-to-go potential retail locations for when the U.S. finally makes a move on CBD and/or cannabis. It will happen. The question if when, not if.
So, yes, Village Farms using stock to acquire WTER makes sense. Or a merger of equals with cbdMD (YCBD) or making a multi state operator like Cresco Labs (CRLBF) or Trulieve (TCNNF) . Neptune Wellness offers synergies while OrganiGram (OGI) , like Village Farms (VFF) , could enjoy U.S. access. Aphria, the closest cannabis-related name to step outside the space, could use an acquisition to expand its diversity further.
Heck, we even saw a similar idea with Genprex (GNPX) stepping outside its core to secure a license for a diabetes treatment that has already turned a $25,000 risk into a $2.59 million grant.
While many companies are pulling back during Covid-19, I think the opposite should be true. Use what the market has given you, a high stock price, to grab businesses that could expand your potential when things level or even begin to return to normal.
Ayro (AYRO) could use the recent run in its stock to lock down the university and college electric vehicle market by scooping up a more desperate mobility play that would appeal to students.
This is the time for forward, outside-the-box thinking CEOs to step up. There's an opportunity out there if you will just let yourself see it.