Let’s talk about cannabis stocks for a bit today…

A few years ago, the industry was all anyone could talk about. Weed stocks surged to new highs and even some of the big boys — namely Constellation Brands with its investment in Canopy Growth Company (Nasdaq: CGC) — were getting into the industry by either purchasing rising stars or partnering with them to develop products like drinks.

Then, cannabis stocks suddenly disappeared from the conversation. Of course, a lot has happened since then (covid, lockdowns, the vaccine race, cryptocurrencies like bitcoin hitting new highs), so it’s understandable.

Over at Maximum Profit, we never really jumped on the cannabis bandwagon. Even though many stocks had great relative strength numbers (a critical component of part of our system), there was just one problem… None of them could muster up enough cash flow growth to pass our “financial health check”, which makes up the other component.

The inability to turn a profit has been a major headwind for the cannabis industry in recent years. As you can see, that lack of profitability eventually caused most stocks in the industry to tank. That’s the other big reason why they faded from the conversation in investing circles.

Here’s a chart of popular cannabis company Aurora Cannabis (NYSE: ACB):

Its halcyon days ended in 2019, and it’s been tough sledding for shareholders since. This just goes to show why our cash flow growth metric is so critical for Maximum Profit. Do put our money to work in “trending” sectors? Sure. But not without tangible evidence that the company is actually executing on its most critical function: producing cash. Because, as we can see from stock chart like this, that lack of cash flow, regardless of how “hot” an industry is, will eventually catch up to a company.

Is 2021 The Year For Weed?

Despite the atrocious last couple of years for the cannabis industry, it seems that the industry is finally beginning to figure it out. And by “it” I mean profitability.

For example, one stock our system recently identified just turned in a positive cash flow year, and it seems the flood gates have opened. The projections for cash flow this year are astronomical.

To be fair, the stock, GrowGeneration (Nasdaq: GRWG), is more of a “picks and shovels” play to the cannabis industry.

The company is the largest chain of hydroponic garden centers in North America in terms of sales and stores. It operates 31 stores across California, Michigan, Colorado, Oklahoma, Maine, Nevada, Washington, Oregon, Rhode Island, and Florida.

Its stores sell growing kits, nutrients for plants, greenhouse lighting, ventilation systems, and gardening accessories.

If you’re not familiar, hydroponics is a specialized method of growing plants in a mineral nutrient-rich water solvent, as opposed to soil. This method is typically used inside greenhouses, providing year-round growing, as well as a better way to regulate and control nutrient delivery, light, air, water, humidity, pests, and temperature. This leads to faster-growing crops with higher yields.

Its products have been in high demand. In 2019, the company pulled in $79.9 million in sales, an incredible 175% increase over the previous year. It’s continued that impressive growth streak more than doubling sales every single quarter in 2020 compared with the same quarter in 2019. It’s on track to end 2020 with sales north of $190 million — crushing its $80 million figure the previous year. The company reports at the beginning of April.

Of course, sales is one thing. But if your costs dwarf sales, then it doesn’t matter how fast you’re growing. Fortunately, as I mentioned, 2020 will be the first year of positive cash flow. The company is on track to generate about $1.6 million in 2020, topping the $3 million loss in 2019. More impressive, however, is that analysts have penciled in more than $28.3 million this year. That’s astronomical growth, and exactly what we like to see over at Maximum Profit.

Action To Take

I normally don’t share our Maximum Profit picks outside of our premium subscribers, but I think the example of GRWG proves an important point.

There’s absolutely nothing wrong with chasing trends. It’s just that you need to be careful. Just because a trend like legalized cannabis has staying power doesn’t mean that the stock you pick will stick around long enough to reap the rewards.

Sure, the cannabis space still faces regulation headwinds. Although many states are beginning to legalize the product, it’s still illegal at the federal level.

But in the case of GRWG, shareholders are rewarding this turnaround in profitability by sending shares to new highs. It also proves why I like “picks and shovels” plays so much – these plays sometimes turn a profit before the main players do.

That’s why we decided to finally jump on the cannabis bandwagon. And we won’t lose a bit of sleep by being a little late to the party.

Some trends are just so powerful to ignore. That’s where I want to have my money…

And if that’s true for you, then I recommend checking out my report of investment predictions for 2021…

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