Why would you want to consider investing in cannabis stocks versus other stocks? Growth rates. Cannabis companies are just gearing up and will continue to build their production levels, increasing revenues, and eventually profits. Investing in cannabis stocks is a process, not an event.
Growth rates are one of the key indicators for how well a stock may perform in the future. I am always trying to compare cannabis stocks to show why cannabis stocks are such a valuable buy. Cannabis stocks have a ways to go, a process on which cannabis federal legalization allows for a more broad and diverse investment base. Then, cannabis stocks need to up-list from OTC to Nasdaq or NYSE. From here, cannabis stocks will outperform the broader market. Since cannabis stocks are at such uncharacteristic levels compared to the future value they offer. Investing in cannabis stocks is not an event, it is a process. That process is showing occurring.
When you compare cannabis stocks to other stocks in the broader market, it is obvious why these stocks will outperform the broader market. Growth rates are far in excess of the broader market. And, this will translate into profit rates that are far in excess of the broader market.
While the process of normalization of investing in cannabis stocks continues to occur, here are some of the reasons why to invest in cannabis stocks.
S&P 500 Growth Rates
The S&P 500 Index is a collection of 500 stocks that mostly represent the US economy. Following trends in the S&P 500 shows what likely occurred in the broader market based upon several ratios and metrics. As you can see in the above chart from the CSI Markets website, on a Year-Over-Year basis, comparing one quarter to the year’s previous quarter shows that there was a 12.13% growth rate in revenue for the entire S&P 500.[1]CSI Markets S&P500 Growth Rates.
As you can see, the rate of growth of revenue gains is heading lower. However, it is still positive from a year-over-year basis. But, that growth rate is narrowing as the economy begins to contract somewhat.
S&P 500 & Margins
Further, there are margin rates to consider. Here are the margin rates during the same period for the S&P 500:
The first line are gross margins. And, as you can see, gross margins are declining over the past few quarters from their peak four quarters earlier. Revenue growth has been declining. This is starting to play out in margins lowering. Still, the 42% growth rate is very high.
EBITDA margins are also declining and this is more pronounced for the entire sector, dropping from the recent peak four quarters prior of 21.82% to almost half at 11.1%.
Next are operating margins whined, again there has been a significant decline in operating margins. The Q4 2021 level was 18.38% but is now all the way down to 8.19%.
Cannabis Stocks Growth & Margins
Now, where are cannabis stocks? As it turns out, some metrics are better and others are still lagging. Nonetheless, if you understand the buildup of a company, you can see that there is a lot of potential in cannabis stocks and investing in cannabis stocks.
Cannabis Stocks Gross margins
Revenue growth has been increasing significantly over the past many quarters. Focusing on just the last quarter, Q2, shows that the growth rate is double that of overall revenue growth for the S&P 500.
Here, also, is a representation of all revenue accumulated over the past several quarters. It is important to conceptualize what is going on here with revenue growth. Then, it is equally important to then look forward to the bigger picture of all cannabis stocks and what is going occurring.
Firms are opening up new dispensaries around the country and throughout the world. This is occurring in Canada, the US, and Europe. Many countries are flipping to cannabis legalization after almost a century of prohibition. Companies that are doing business in these countries are just starting out and building large infrastructure projects.
The overall picture is that revenue is growing within the industry. But, not all companies are increasing their revenue. I have ~100 stocks that I follow. Some 35 printed negative revenue for Q2.
The importance of grasping that is that while all stocks are printing revenue increase or decreases, despite there being some with negative growth, revenues hit an all-time high last quarter. To be certain, not all companies in the S&P 500 printed increasing revenues, also.
Given this, some companies printed revenue gains that far exceeded the overall 23%. These are the companies that an investor want to seek out.
Cannabis Stocks & Margins
While revenue growth is important, margins are what are next. As you can see above, gross margins were at 42% for the quarter with the S&P 500. Where are cannabis stocks? Not far behind at all:
Above are the Cannabis Stocks Gross Profits & Cannabis Stocks Gross Margins for the entire industry. Despite a big differential in positive and negative growth cannabis stocks, cannabis stocks gross margins are just shy of the overall bigger picture.
Cannabis stocks are poised to overcome gross margins versus the S&P 500. Keep in mind, you are looking at this with an eye toward including the revenue growth rate which for cannabis stocks in increasing at an increasing rate versus the broader market increasing at a decreasing rate.
Here is a graphic representation of cannabis gross margins on a whole. While there was a substantial drop in gross margins two quarters previous, gross margins are trending back upward.
Cannabis Stocks EBITDA
There will be significant increases in profitability once cannabis federal legalization occurs. Once cannabis companies can write down certain costs, these companies will see significant increases in their profits. Given this, EBITDA numbers will increase significantly for cannabis stocks. While these numbers are negative for now, this is a short term disposition with tremendous upside potential.
Cannabis Stocks Operating Margins
Just as EBITDA rates will improve, so will cannabis stocks’ operating margins. After legalization, there will be sharp increases in these areas. Therefore, these numbers do not coincide with the potential for cannabis companies actual profits. Nonetheless, an investor can see where things will get interesting for cannabis stocks and investors.
Understanding Ratios
To better understand ratios & margins, here is a video discussing this form my How To Invest in Stocks series:
References
| ↑1 | CSI Markets S&P500 Growth Rates |
|---|---|
| ↑2 | CSI Markets Margins |
