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Which ASX pot stock could beat Roger Federer on grass?

Last Sunday tennis superstar Roger Federer won the Wimbledon championships at the age of 35 for a record eighth time to become the undisputed king of grass.

Although on the local share market there are a few companies seeking to make more money off grass than Roger Federer and they appear to have a fan club almost as big.

These include Stemcell Utd (ASX: SCU) that recently appointed the self-styled “King of Cannabis”, Nevil Schoenmakers, as an industry adviser. It climbed more than 2,500% in a day on the news of his appointment in March, before crashing back down to earth again.

While medical cannabis players like MMJ Phytotech Ltd (ASX: MMJ)Creso Pharma Ltd (ASX: CPH) and Auscann Group Holdings Ltd (ASX: AC8) are up between 60% and more than 200% over 2017 to give a whole new meaning to the trading mantra of buy low, sell high.

But you won’t get high on these companies’ profits. Because they don’t have any. In fact for the quarter ending March 31 2017 they generated just $15,000 in revenues between them, which means they’re firmly in the long-shot bucket as to their chances of ever generating sustainable returns for investors.

In fact if you’re a serious investor you should look to companies that are already growing revenues to generate free cash flows that companies are able to pay out as growing dividends.

It’s the only way, because at the end of the day investing is all about free cash flow growth as share prices will follow dividends and expectations for future dividends higher or lower over time.

So who could profit from growing demand for medical marijuana?

One company with a long and successful track record of growing its dividend payments to investors and an intention to move into the medical marijuana space is vitamins manufacturer Blackmores Limited (ASX: BKL).

It recently announced that its natural health and nutritionals business Bioceuticals “will seek authorisation to launch medical cannabis products through general practitioners and medical specialists”.

For the six-month period ending December 31 2016, Blackmores’ Bioceuticals business grew revenues an impressive 19% to $51 million and delivered earnings before tax of $7.7 million.

For the period the whole Blackmores group posted EBIT of $42 million, which means it has the financial muscle to invest heavily in the medical cannabis product space if it so chooses.

The problem for the dozen or so startup medical cannabis businesses is that with almost nothing in the way of revenues and large upcoming capex, operational, and investment costs they are likely to need to raise capital down the line just to mover closer to generating credible revenues or even profits.

As such no serious (or sane) investor would buy shares in companies that don’t generate revenues, which is why I would look to Blackmores as an investment if I were determined to get some exposure to the potential growth in demand for medical cannabis products.

Motley Fool contributor Tom Richardson owns shares of Blackmores Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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