Smallcap and microcap investors have to be willing to search the entire globe and explore every possible industry to find the hidden gems that can provide the outsized returns that are possible in the space. On rare occasions, a new industry is created either through technological innovation or changes in government regulation. One such industry is the Canadian cannabis market, which has opened up in recent years and is a young sector with the potential for outsized growth. The space is crowded right now as there is somewhat of a gold rush atmosphere, so finding the companies that are poised to be long-term winners is a difficult but worthwhile endeavor.
One potential winner is Ayurcann Holdings (CSE: AYUR) (OTCQB: AYURF) which is a diversified outsourcing service provider to the Canadian cannabis market. The company’s services include white labeling, oil extraction and refinement, bulk oil distillate sales, packaging solutions, inventory management, and medical cannabis products such as tinctures, topical solutions, and vapes.
The recreational cannabis market in Canada was $2.6 billion in 2020 and is estimated to grow to $8.6 billion by 2026 according to Statista. In addition to a favorable macro environment, Ayurcann has a few catalysts working in its favor. The company recently received government approval to grow their plants which should improve margins as they integrate their supply chain and should not have to rely on buying plants from other firms. Recent market expansion should also provide upside, as the company now sells products in Alberta, Ontario, Saskatchewan, New Brunswick, and Manitoba. Previously they only were able to see in New Brunswick and Saskatchewan, but now Canada’s biggest markets are in the company’s footprint.
In the most recent quarter, fiscal 2Q 2022 (ended December 2021) the company reported accelerating revenue, which was up 106% year over year to come in at $3.2 million. Gross margin and EBITDA are also on the upswing, coming in at 56% and 25%, respectively, for the same period. Strong performance in the white labeled products category should offset softness in the oil distillate category and the expanded market footprint should be a major driver of results going forward. The white labeling category is especially attractive as it functions like a toll collecting business where Ayurcann can simply collect its fees and not have to be concerned with branding.
The sector and company certainly have risks involved. The cannabis industry is still in a bit of a wild west phase currently, with numerous market participants entering and exiting the space rapidly. The sector is still young enough where the dominant players have yet to be established, so there is a horserace atmosphere still. The company is a penny stock, and such low-priced stocks can fluctuate wildly so investors need to exercise care and take their time building (or reducing) positions so as not to cause big swings in the price. If however, Ayurcann can continue its expansion into new markets and successfully expand its product portfolio, the company is poised to be one of the winners in a new and growing industry.
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