I haven’t held the cannabis industry in high regard since the nascent industry began. It was a wild west type of investing, where stocks shot up and crashed on sentiment and feelings rather than on fundamentals. The only area of the cannabis space that held any weight in my mind was that of medical marijuana production.
Medical marijuana, after all, appears to have many positive attributes. It holds promise as a medicine in the treatment of epilepsy as well as many other ailments. In that regard, I stumbled upon one name that might be a decent pure-play in the medical marijuana sector.
However, this is an early-stage growth stock that I would only recommend for investors with long time horizons.
The oily names
Oil has primarily meant black gold for me over the years, but it turns out there is another type of oil worth looking into. Medipharm Labs Corp. (TSX:LABS) focuses on extracting medical-grade cannabis oil from marijuana plants. Its business is solely focused on extraction, a process that seems to have a wider moat than merely selling the commodity plant products.
The company had enormous growth in revenue over fiscal 2019. Revenue grew by 1,168% over that period. EBITDA also grew incredibly, increasing 2,844% in the same time frame. Gross profit increased by 973% and net income increased by 180%. Net income was positive for the year, which is quite amazing for a new company at this early stage of growth.
Of course, investors need to keep in mind that the company is a new one, which means that growth will be rapid in the early stages. After all, earnings and revenue started from a very low level making any increase seem huge on a percentage basis.
The company is new, though, and its share count is expanding. This will be dilutive to existing shareholders if Medipharm continues to issue shares. It also does not yet generate free cash flow due to its continued business investment and growth.
There are two aspects of this business I find very appealing. The first is the focus on medical purposes. The attention to producing medical-grade oils puts this firmly into the high-demand medical marijuana business. It sells both its own brands of oil as well as unbranded types.
The Foolish takeaway
I am not a big fan of investing in cannabis stocks in general. It seems like recreational marijuana is a difficult business and the product itself is more of a commodity than anything. The oil extraction business is more technical, especially if you are aiming for medical-grade oil. Medipharm seems to have a greater moat around its business than the producers.
This is a new business that is very speculative in nature. However, if you are looking to invest in the burgeoning medical marijuana space, Medipharm is as good a bet as any. It does look set on building a business that fits a core need, has a product that is certainly growing in demand and is starting to grow in profitability.
If you are a millennial investor with a long time horizon who believes in the medical side of the cannabis industry, you might want to give Medipharm a try.
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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 Kris Knutson owns shares of MediPharm Labs.