I’ve never been a big fan of penny stocks on the TSX Venture exchange. They’re ridiculously volatile and can be harmful to the wealth of many upside-hungry investors who just want to make a quick buck with little to no consideration for the downside risks involved. For many beginner investors, there’s a great appeal in low-cost stocks. One can buy more shares for less, and there’s an illusion that more shares of a lower-cost company can improve one’s odds of scoring a major multi-bagger.
Moreover, some may think that just because a stock has a low price that it doesn’t have that much downside. Just like a $1,000 stock, a $1 stock can just as easily, if not more easily, lose a substantial percentage of its value at any instance. Any perceived margin of safety with such low-cost penny stocks is just an illusion. To recognize a real margin of safety, the investor must conduct a careful analysis of the company and determine an intrinsic value range.
There’s no margin of safety with a $1 stock whose intrinsic value is in the $0.25-0.30 range. You’d be overpaying for a seemingly “cheap” stock, just like you would with a $1,000 stock with an intrinsic value range between $250-300.
Cannabis retail: The next frontier in the pot space?
Now that my penny stock warning is out of the way, I’d like to draw your attention to a compelling sub-$1 penny stock that’s a decent value relative to its growth prospects. Moreover, the firm has the backing of an established behemoth that has a vested interest (~9.6% stake) in the business.
The company I’m talking about is Fire & Flower Holdings (TSX:FAF), an up-and-coming cannabis retailer that has the legendary convenience store kingpin Alimentation Couche-Tard (TSX:ATD.B) standing in its corner.
The cannabis bubble has burst, and although there’s a tonne of value to be had in the industry, there are few buyers at these depths. While many pot shops are popping up across Canada, Fire & Flower should be a preferred play because of its recent co-location initiative with Couche’s Circle K convenience stores in the province of Alberta.
Fire & Flower pot shops and Circle K could form a meaningful symbiosis with one another. When it comes to retail, it’s all about location, location, location.
As you may know, the local Circle K tends to garner a considerable amount of foot traffic. An adjacent pot shop will benefit from such foot traffic, as consumers look to pick up cannabis products alongside their c-store mini-haul. Munchies and weed are perfect complements, and should the Flower-Couche partnership start paying dividends, I’d be unsurprised if Couche ends up gobbling up Fire & Flower entirely if it can strike the right price.
Foolish takeaway
Now, I’m not an advocate of playing takeover roulette. However, given Fire & Flower has unique advantages over its peers in the pot retail space and the fact that shares are dirt cheap on a price-to-sales basis (1.7x sales at the time of writing), I’d say FAF stock is a high-upside bet with less downside risk than most other low cost penny stocks out there.
The company boasts a $138.2 million market cap and is a compelling microcap bet with real fundamentals. I’d look to initiate a position following the company’s latest revenue beat, as you look to invest alongside one of the best value-conscious convenience retail kings out there.
