Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2022 contest. Thomas Yeung’s pick for the contest is POSaBIT (OTCMKTS:POSAF) stock.
When I first covered POSaBIT Systems (OTCMKTS:POSAF) for the InvestorPlace Best Stocks for 2022 contest last year, shares of the over the counter cannabis point-of-sale (POS) firm were trading at $1.Â
And life was good.
Management was confident they could deliver 91% year-over-year revenue growth, making it one of the fastest-growing penny stocks on the market.
Fast forward six months, and the company still seems on track to deliver.
“I want to end today’s call by reiterating our 2020 guidance and express our confidence in hitting these numbers,” CEO Ryan Hamlin said in his Q1 update. “We have the largest backlog of contracted locations in the history of the company and a very robust pipeline of new business opportunities in the mix.”
But shares have managed to disappoint — rising to $2.12 before crashing back to around 50 cents. It’s as if market prices have entirely detached from reality.
The culprit, of course, is shifting investor sentiment. 70% of POSaBIT’s monthly returns are explained by changes in Bitcoin’s (BTC-USD) price, for instance. And general recession fears have put a wet blanket on the entire penny stock market.
Still, falling prices should make investors more interested in POSaBIT, not less. And as POSaBIT’s point-of-sale business continues to motor ahead, patient investors will eventually find themselves rewarded for holding on.
Why POSAF Stock Can Succeed
POSaBIT operates a network of POS devices for the cannabis industry. It’s a lucrative business with few traditional competitors. Marijuana remains a Schedule 1 substance under federal laws, preventing most publicly-traded companies from breaking in.
These rules affect traditional finance firms from Visa (NYSE:V) to Fiserv (NASDAQ:FISV), the owner of the Clover point-of-sale systems, and they also affect upstarts such as PayPal (NASDAQ:PYPL) and Square parent Block (NYSE:SQ).
“PayPal closed my personal account and held over $900 dollars for 6 months because I make CBD-infused bath bombs,” Cherry River CBD founder Alison Warlitner said in an interview. “Because I also had a business account they blocked my entire household from ever having a PayPal account.”
These frustrations extend beyond small business owners. Nationally-licensed banks are also prohibited from helping marijuana dispensaries accept payments and manage money.
That’s left the door open for upstarts like POSaBIT, which is exempt from these rules thanks to its Canadian-based listing and clever use of legal loopholes. Rather than use national credit card networks, POSaBIT uses a combination of PIN debit, point-of-banking and direct ACH payments with local credit unions to skirt federal laws.
These tactics have helped POSaBIT grow like… well… a weed. During a May 3 update, CEO Ryan Hamlin said the company expected to add 100 stores in the next 60 days. First quarter revenue was $6.4 million, up 79% year-over-year.
Profits are also relatively stable since POSaBIT continues to take a cut of a dispensary’s revenues rather than its profits. Gross profits have remained consistently in the 22% – 27% range.
Purple Haze
But even POSaBIT hasn’t been immune to shifting sentiment.
On the consumer side, the firm saw unusually soft volumes in the first several months of 2022.
“Lower demand and lower average order sizes led to an overall decline across the industry,” Hamlin noted in the Q1 call. “ We speculate that this was due to both the loss of government subsidized checks as well as a significant reduction in cannabis consumption industry-wide.”
Investors have tightened their purse strings as well. Square’s parent Block has seen shares drop 60% this year, while PayPal is down even more. It’s been a tough year for fintech investors.
But green shoots are already starting to emerge.Â
“Beginning with the month of March, pricing began to stabilize and many MSOs reported that demand is coming back,” Hamlin continued in the Q1 call. “Our March volume increased more than 20% compared to February, representing the largest volume month in our corporate history.”
And even some investors are tip-toeing back into high-growth bets. The Nasdaq index is up 8% from its lows.
IS POSAF Stock the Top Penny Stock of 2022?
Low share prices… reaccelerating growth… financial uncertainty… These are the classic signs of a turnaround in the penny stock market. Car rental firm Hertz (NASDAQ:HTZ) saw similar moves when its shares dropped from $4 to $2 before surging past $8.
Yet, we all know that penny stock investing is risky at best. For every penny stock like Hertz that survives a 50% drop in share price, plenty more keep making their way to zero. Failing firms like JC Penney and Sears have lost hopeful investors millions.
That means investing in my top penny stock pick for 2022 should still be done with a measure of restraint. Even though POSaBIT now holds a 5x return potential, investors should only tip-toe back into the stock with cash they can stand to lose. Such is the discipline needed when investing in the top penny stocks of 2022.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
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