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.
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.
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 Joey Frenette has no position in any of the stocks mentioned.