Investors: Is This Cannabis Stock on the Verge of a Breakout?

Why investors need to keep an eye on The Supreme Cannabis Company Inc. (TSX:FIRE) over the next few months.

question marks written reminders tickets

Image source: Getty Images

Shares of The Supreme Cannabis Company (TSX:FIRE) have generated marginal returns since listing as a public company in June 2017. The stock closed trading at $1.35 per share on June 9, 2017, and is currently trading at $1.38 per share at writing.

It reached an all-time high of $3.04 in January 2018, and it looked like FIRE shares were making an upward move in early 2019, but the stock has fallen 37% in the last six months. The cannabis stocks are undergoing a period of correction. The Horizons Marijuana Life Sciences Index ETF has fallen 40% since March 2019.

The cannabis stocks were overvalued and have come crashing down. Here we look at the valuation of FIRE as well as its revenue and earnings growth to determine whether the stock is a good bet at the current price.

Overview

Supreme Cannabis has a diversified portfolio of cannabis products. Its portfolio includes 7ACRES, Supreme’s wholly owned subsidiary. 7ACRES is a licensed producer with a 440,000 square feet cultivation facility in Ontario.

Supreme’s document states, “Through 7ACRES, Supreme Cannabis grows premium cannabis flower and utilizes proprietary growing methodology resulting in an exceptional consumer experience. From the genetics selected to maximize aroma and visual appeal, to cultivation methodologies that prioritize subjective quality over yield and proprietary post-harvest drying and curing practices, 7ACRES premium cannabis flower and products were designed with the intention to maximize consumer enjoyment.”

Strategy for domestic and international markets

Similar to other cannabis companies, Supreme Cannabis is also optimistic about the tremendous growth opportunity in the global and domestic medical marijuana market, and aims to grow sales via several partnerships.

In June 2018, Supreme invested in Medigrow, a licensed producer of cannabis in the Kingdom of Lesotho. It also signed a contract with Malta Enterprises that will see it obtain a cannabis production license in Malta. This partnership will help Supreme Cannabis gain a foothold in the growing medical and wellness marijuana market in Europe.

Strong revenue growth

Supreme Cannabis has experienced strong revenue growth as a public limited company. In the fiscal third quarter of 2019 (ended in March), it reported sales of $10 million, a rise of 382% year over year.

This revenue growth was driven by increased production at its 7ACRES facility and strong demand for the company’s premium dry cannabis flower product.

Supreme Cannabis also experienced an uptick in sales volumes in the third quarter. Analysts expect the company sales to rise by 440% to $19.14 million in the fourth quarter. This will mean revenue of $40.77 million in fiscal 2019, a growth of 360.4% year over year. Analysts expect sales to rise 267% to $149.63 million in 2020.

While still unprofitable, FIRE will rapidly improve the bottom line going forward. Analysts expect the net margin to rise from -42% in 2019 to 20% in 2021. This robust margin improvement will attract investors.

Verdict

Supreme Cannabis is currently valued at $464 million, about 11.6 times 2019 sales, which isn’t not too expensive given the valuation of peer cannabis companies. Aurora Cannabis, Canopy Growth, and Hexo are currently valued at 30, 18 and 22-times sales, respectively.

FIRE has tremendous upside potential. Analysts have a 12-month average target price of $3.01 for the stock, which means FIRE is trading at a discount of 114%.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

More on Cannabis Stocks

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

Cannabis grows at a commercial farm.
Cannabis Stocks

Why Canopy Growth Stock Could Double in 2024

Canopy Growth (TSX:WEED) stock saw its share more than double in the last two weeks. So, can it do it…

Read more »

Coworkers standing near a wall
Cannabis Stocks

Why Is Everyone Talking About Canopy Growth Stock?

Canopy Growth stock (TSX:WEED) saw shares surge in the last two weeks for a variety of reasons investors can dig…

Read more »

Pot stocks are a riskier investment
Stocks for Beginners

Why Shares of Cannabis Stocks Are Rising This Week

Cannabis stocks received a boost this week as the White House urged the drug enforcement administration to reschedule the drug.

Read more »

A person holds a small glass jar of marijuana.
Stocks for Beginners

Why Canopy Growth Stock Jumped 16% on Wednesday

Canopy Growth stock (TSX:WEED) is up 16% on Wednesday, adding to a surge of 60% growth in the last week…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Is the Worst Over for Canopy Growth Stock?

Down 99% from all-time highs Canopy Growth stock has burnt investor wealth and remains a high-risk investment.

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Steer Clear: This Stock Spells Trouble

A newly listed cannabis stock is outperforming in 2024 but investors should stay clear to avoid trouble and losses.

Read more »

Cannabis stocks have fallen.
Cannabis Stocks

2 Best Marijuana Stocks to Buy This Month

Marijuana stocks in the U.S. such as Green Thumb and Curaleaf can help you deliver outsized gains to investors in…

Read more »