Finding the next Jushi (549% 12-month return) – Part 1

Most investors in U.S cannabis stocks own the big multi-state operators like Curaleaf, Green Thumb, Trulieve, Terrascend, Columbia Care, and Jushi. These companies have market capitalizations of over $2 billion and have provided investors some amazing returns in 2020 that have continued into 2021. For example, Jushi’s stock (OTC: JUSHF) has gained 549% in the last 12 months (as of 7 Feb, 2021) – propelling it into the top-tier discussion. To see returns like that, you need to find cannabis companies that are flying under the radar and buy them while they are micro-cap stocks (market capitalization of less than $300 million).

What is the process I am using to find the next Jushi?

Note: I built a Cannabis Investor Portal to help sort U.S. cannabis companies by market cap. All my data is pulled from that.

1. Start with a list of micro cap cannabis stocks

Before Jushi had its 550% run, it was a 370 million market cap stock that has grown to over $2 billion in value today. Generally, micro-cap stocks are considered $300 million or less, but for this article, I’ll consider that Jushi was close enough to micro-cap stock status before its massive stock price appreciation.

2. Find the low Price-to-Sales (P/S) ratio stocks

P/S is computed by dividing the current market cap by a full year of revenue. This P/S ratio is a starting point to see if a stock is trading higher or lower than the industry average. For my Cannabis Investor Portal, I take the most recent quarterly earnings and multiply it by 4 to get an annualized revenue figure rather than using a trailing-twelve-month (TTM) figure. Per my research of 29 cannabis companies, the average P/S is 9.4.

As of Feb 7, Jushi traded at a P/S ratio of 20, but before its massive stock run, Jushi started at an equivalent P/S of 4.5, or half the current 9 P/S cannabis industry average. Jushi was a 370 million market cap with a P/S of 4.5 twelve months ago and that is my starting point for finding the next Jushi. Next, I’ll build a list of companies with less than $400 million market cap and a P/S of 5 or less and then eliminate the ones I feel have serious issues to address.

3. Build the list of micro cap cannabis stocks with a low P/S

Out of the 29 stocks on my Cannabis Investor Portal, there are 11 companies with a P/S ratio of 5. Here they are sorted by highest to lowest P/S):

  • C21 Investments: 5.6
  • Indus Holdings: 5.5
  • MariMed: 5
  • MedMen: 4.4
  • Vext Science: 4
  • Cansortium: 3.7
  • Halo Collective: 3.3
  • Greenlane Holdings: 2.1
  • Tilt Holdings: 1.9
  • Hollister Biosciences: 1.9
  • Harborside: 1.7

A company’s P/S ratio alone doesn’t tell the entire picture – is it low because the company is performing badly or is it low because the company is flying under the radar? As an investor, it is up to you to do the research and figure that out. I also understand there are factors like earnings-per-shares, price-to-EBITDA, and a host of other factors to consider which I will examine as I narrow down the list. In part 2, I will eliminate the companies I feel deserve a low P/S, and what will remain are the companies I feel are flying under the radar and selling cheap with an opportunity to be the next Jushi.

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