This Unknown Marijuana Stock Could Return 400% in 2017

April 19, 2017 - By: Baystreet Staff

To say that it’s an interesting time to be in the marijuana business is an understatement. With the relaxing and in some cases abolishment of laws related to medicinal and recreational marijuana use, a brand new multi-billion-dollar market is being created that offers huge upside for investors that can sniff out the companies and management teams that will deliver long term value to shareholders.

So, How Big is This Going to Be?

Have you ever wondered just how big the marijuana business will be? In 2016, U.S. marijuana sales were nearly $7 billion, up 30% from 2015. Many industry observers and analysts believe the market will reach $20 - $25 billion by 2020. And, if that’s not enough, the highly-respected New York based investment bank Cowen and Company believes that the U.S. marijuana market could reach $50 billion by 2026. A large driver of this growth is California’s complete legalization of marijuana, which Cowen believes could triple the U.S. market.

Also, Canada is likely to legalize marijuana in the next several months. Just this past week, Prime Minister Justin Trudeau introduced legislation to legalize the recreational use of marijuana. The Canadian market is estimated to reach somewhere between $5 and $9 billion by 2021.

The Who’s Who of The Marijuana Sector

Companies such as GW Pharmaceuticals (NASDAQ: GWPH), Insys Therapeutics (NASDAQ: INSY) and Corbus Pharmaceuticals Holdings (NASDAQ: CRBP) have focused on developing cannabinoid based medicines that will be regulated and approved by global healthcare regulators (the FDA in the U.S.).

For the conservative investor that wants exposure to the medicinal marijuana market, these stocks can be a good buy. The downside is that they’re widely known among both retail and institutional investors, which means their valuations are likely where they should be based on each company’s product potential. In some cases, they may even be overvalued because of the exposure they have received and the competition they will face from unregulated but legal medicinal marijuana products.

Scott’s Miracle Gro (NYSE: SMG) is another mature company that has taken a serious interest in the business of marijuana. Although you won't find any products sold by Scotts Miracle-Gro that contain even a trace of marijuana, SMG has been aggressively scooping up leading hydroponics companies over the past few years. Clearly the aim here is to position the Company as a dominant supplier of fertilizers and hydroponic products to growers of marijuana.

SMG's latest 10-K annual report filing to the U.S. Securities and Exchange Commission states that the company's hydroponic gardening products "may be purchased for use in industries or segments that are subject to inconsistent and rapidly changing laws and regulations with evolving consumer perceptions." That's a fairly accurate description of the U.S. marijuana industry.

Solistek (SLTK): An Un-Discovered Marijuana Stock with Big Potential in 2017

Unquestionably, the continued legalization of marijuana in the U.S. and Canada will lead to serious growth in 2017, but investors hoping to buy stocks to benefit from this growth have limited options. Many marijuana stocks are traded on small exchanges that are ripe with fraud and provide limited disclosure to shareholders. Most that have any kind of fundamentals (e.g. revenue, good management, or earnings) have fell victim to irrational hype that has driven their valuations to wacky levels that in most cases are unsustainable.

We believe Solistek (OTCQB: SLTK) could be the exception, and may offer several hundred percent upside to investors should the Company continue to grow revenue and directly benefit from an exploding market for marijuana.

Solistek is a rapidly growing company that provides innovative lighting equipment to the marijuana industry. The Company had revenues of ~$8.5M in 2016 and is profitable. In 2016, Gross Profit was over $3M and Gross Margin was around 36%. In case you’re wondering, finding profitable, publicly traded companies in the marijuana sector with year over year revenue growth is no easy task.
Solistek has a proven business model which mitigates the downside risk for investors looking for upside in what is typically a very risky sector. SLTK’s products are distributed by more than 500 retailers and 4 wholesale distributors that cover the U.S., Canada, Spain and the U.K. And, in 2016 Solistek won Dope Magazine’s Best Lighting Company Award.

SLTK’s Management is Proven & Properly Incentivized

SLTK’s management owns more than 75% of the company’s shares, which means they are highly incentivized to maximize the value of the stock and to avoid dilutive and/or toxic financings that destroy the capital structure of small OTC stocks. Especially in OTC land, the name of the game is stock promotion and toxic financings, usually leaving unsuspecting retail investors holding the bag. Based on their actions to-date, we are optimist that SLTK will responsibly capitalize the company and continue to do what’s best for shareholders.

The newly appointed CEO, Dennis G. Forchic, (co)-founded five start-up entities over the last 25 years. His experience includes leading multiple early stage growth companies to top line revenues in the mid-to-upper eight figure range prior to exiting through successful sales transactions to the investment communities. We’d like to think he believes that Solistek has the potential for upper 8 figure revenues, at the very least. If this happens, investors should expect the stock to be trading at a several hundred percent premium to where it trades today.

The Bottom Line: Where Should SLTK Be Trading?

Earnings and revenue multiples for marijuana stocks are all over the map. There are a handful of companies, such as Canopy Growth Corporation (OTCQB: TWMJF), that trade at a 100x multiple on 2016 top line revenue. In other words, as of publication of this article, Canopy Growth has a CAD $1.56 billion market cap, and only a mere $12.7M in 2016 revenue. If SLTK was given the same multiple, its valuation would be around $850M and the price per share would be north of $23. This would represent a more than 2000% return if one were to buy the stock at its current price of $1.20 per share.

Kush Bottles (OTCQB: KSHB) is another interesting comparable to SLTK. Kush is similar to SLTK in that it does not sell or grow marijuana – it provides custom packaging solutions to companies in the marijuana space. In 2016 KSHB reported revenue of $8.22M with similar Gross Margins to SLTK. However, KSHB appears to be better known to investors and trades at $123 million market cap. This is a 15x multiple on top line revenue. If SLTK were to trade at this multiple, would be roughly 400% higher than it is today.

What’s the bottom line? If SLTK continues to show quarter over quarter revenue growth and continues to increase awareness of the company among investors, we believe that the stock could trade at a multiple of where it is today, especially if the Company continues to execute on its business.

SLTK has a $43 million market cap based on yesterday’s closing price of $1.20/share. If the Company continues to execute in 2017, we believe their revenue multiple and corresponding price per share could fall in line with other companies in the sector like KSHB (15x 2016 revenue) and Canopy Growth Corporation (100x 2016 revenue). Should this happen, anyone that happens to be long SLTK at today’s valuation will be extremely pleased with the return on their investment.

About One Equity Stocks

One Equity Stocks is a leading provider of research on publicly traded emerging growth companies. Our team is comprised of sophisticated financial professionals that strive to find the companies and management teams that will outperform the market and deliver investment returns to our subscribers. We are not a licensed broker dealer and do not publish investment advice and remind readers that investing involves considerable risk. One Equity Stocks encourages all readers to carefully review the SEC filings of any issuers we cover and consult with an investment professional before making any investment decisions. One Equity Stocks is a for profit business and is usually compensated for coverage of issuers. In the case of SLTK, we have been compensated $9,500 for Advisory Services and Expenses related to the provision of such services. We may receive additional compensation in the future.

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