In the academy award winning Bohemian Rhapsody, a comedian appears with the following tagline, “ My name is Jackie Vernon; I am a real dull guy.” The same description can be said for the recent performance of CV Sciences (CVSI) stock—dull and uninspiring.
A year ago CV Sciences was a standout in a hot market for cannabis stocks. Between March and August 2018 the shares increased nearly 20 fold, reaching $8.14. Since that time, things have been different.
From last November (about the low point for cannabis stocks), CVSI shareholders have lost nearly 30 percent. A modest rally to date in 2019 is encouraging, but CVSI’s performance this year (+5.3 percent) lags the overall market.
Investors will recognize that this price pattern is far from typical for the average cannabis stock that has experienced better than a 52 percent gain so far this year. Explaining the odd action in CVSI stock may be as simple as understanding how different the company is from the pack.
A look at recently reported Q4 and full year 2018 results will illustrate just a few of the differences. Let’s begin with the raw numbers. For the year, revenues increased 133 percent reaching $48.2 million. As impressive as it sounds, the rate of gain is less than many cannabis industry companies. Maybe the investment world was spoiled.
Investors are always looking at the trends in the data. This might explain a few things. The company’s March 12 report to shareholders chose to highlight solid full-year results, thus overlooking some less glamorous facts about the fourth quarter. It took a bit of digging, but here is what was buried.
For the fourth quarter, the revenue gains slowed to 96 percent, or $14.2 million. There is nothing to be embarrassed about a near doubling in business, but a slowdown is seldom greeted warmly on Wall Street. Either this change is inconsequential, or management wanted to focus only on the bright side. We will make no guesses, but there is more.
CVSI financials shine with profitability. Gross profits for the year were an impressive 70.2 percent. However, in Q4 GP was a bit less impressive 66.4 percent. No mention of either measure was made in the press release.
What was mentioned was the $10.2 million in full-year operating profits and how this represented 21.2 percent of revenues. What was not said was the dip to 20.4 percent in Q4. For that, you needed to do a fair amount of digging, and that takes more than a few minutes.
Not a capital crime
So is CVSI management out to deceive investors? Most likely not. Under the worst set of circumstances, they simply wanted to tell their best story. Who, after all, hasn’t done that? But since we started with the question as to why CVSI investors have found the stock so unrewarding this year, Q4 could be part of the answer to the puzzle.
Revenue measures still moving up rapidly
Las Vegas-based CVSI sees itself more as a life science company than a play on cannabis. It operates in both Speciality Pharma and Consumer Products. Much like a conventional drug company, CVSI focuses on CBD to develop prescription drugs. Its big project these days is something called CVSI-007 for smokeless tobacco addiction. While this long fuse project proceeds, the company is building distribution for its PlusCBD Oil, nutraceuticals, specialty foods, etc.
The company’s retail channel grew to 2,238 stores nationwide in 2018, up from 1548 the year before. Obviously, this is a good data point for the company to further develop in 2019.
Searching for the answer
In the end, there are three possible explanations for the dull stock performance. The first could well be that the company's business model, as profitable as it is, just lacks the sizzle of recreational cannabis and that the approval process for CVSI-007 is typically long and arduous.
The second reason could well be the slippage that we just noted in the fourth quarter. Just about anyone with the willingness to dig deep into the SEC filing could have discovered the change of trend. So that is the guess into which I am locked.
The third reason may also be the absence of investor support on Wall Street. Presently only one analyst follows the company. That is the bad news. On the other hand, the good news is that the stock is rated as a buy with a one-year price target of $8 or nearly double current levels. And for what it is worth, the estimate for 2019 EPS is $0.17.
A company with an outlook for more than a 50 percent increase and near double in share price, now that is not the least bit dull. Just remember, these are the opinions of one Wall Street analyst. So get the facts, and you be the judge.