As the U.S. cannabis industry continues its expansion, there will certainly be companies that end up as long-term winners. With that said, it has been difficult for investors to determine which cannabis stocks are worthy of adding. Early stocks that attracted attention such as Aurora Cannabis (NYSE:ACB) have been falling hard this year and are a reminder that this burgeoning industry does have its risks. Still, this is a market that could be worth billions. Although we simply don’t know how things will play out in the future with cannabis at this time, there are positive signs. With more states legalizing recreational cannabis use and cannabis legalization finding its way onto ballots, it might only be a matter of time before we see widespread legalization.
Since cannabis is still illegal federally, investors tend to view Canadian cannabis stocks as safer alternatives to domestic companies. However, that doesn’t mean there isn’t potential here in the United States. One company that looks like a solid option regardless of whether or not cannabis is federally legalized is GrowGeneration Corp (NASDAQ:GRWG), a small-cap stock that has rocketed higher after strong Q2 earnings. There are a few reasons why this might be a big winner in the cannabis sector, so let’s discuss them in detail below.
Addressing a Niche Market
The cannabis industry is very competitive. With new companies sprouting up like weeds seemingly every few months, it’s difficult to find a cannabis stock that has a true competitive advantage. That’s one of the reasons why GrowGeneration is an interesting prospect. Since it’s business is focused on the niche market of cannabis growing supplies, it is well-positioned to benefit from the current demand for cannabis gardening supplies in legal states as well as if additional states eventually legalize.
Most traditional gardening stores will not carry products like specialized lighting and hydroponic equipment that are used to grow cannabis. That makes GrowGeneration the only game in town for specialty store chains catering to cannabis growers. The company currently has 28 stores in legalized markets and intends to grow that store count by double in 2021 by purchasing independent operators. If cannabis is eventually legalized on a larger scale, GrowGeneration has the potential to be a big winner thanks to its strength in a specialty market.
Impressive Q2 Earnings
The recent big move up for GrowGeneration stock is directly related to its impressive Q2 earnings report, as investors were clearly intrigued by the results. The company reported some very strong top-line growth with Q2 revenues up 123% year-over-year to $43.5 million. GrowGeneration also delivered positive news with an Adjusted EBITDA increase of 166% year-over-year to $4.6 million. For a small-cap cannabis company to report such strong growth in an uncertain economy is nothing short of remarkable.
Perhaps the most exciting thing about GrowGeneration’s second-quarter was the fact that same-store sales were up 49% year-over-year to $25.1 million. This tells us that more people are visiting GrowGeneration stores than ever before. This company also has a commercial division that is seeing strong growth, with 167 new commercial accounts added in Q2. It’s also worth noting that GrowGeneration’s online sales are coming along too, as in Q2 its online business increased by 149%. This type of growth led the stock to jump over 100% in the trading days following the earnings release. It has sold off a bit after the initial rally, but that was likely just some profit-taking after a monster move.
The Cannabis Stock to Own?
There are undoubtedly some exciting things for investors to like right now about cannabis stocks. With more states legalizing cannabis, high consumer demand related to the pandemic, and cannabis use becoming more and more socially acceptable, a company like GrowGeneration should be considered as one of the best cannabis stocks to own. It is growing at a rapid pace and has now rewarded investors with its 10th straight quarter of record sales. GrowGeneration also has a proven business model and a management team that is focused on rapid growth.
Buying shares of this stock after last week’s rally might not be the most prudent move, but you should keep an eye on this company going forward if you are interested in cannabis companies. Should cannabis be legalized on a federal level or more states vote in favor of recreational legalization, companies like GrowGeneration will be ready to pounce on the opportunity.
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