One of the darlings of the stock market in 2019 was Ecofibre Ltd [ASX:EOF]. It raised money for its IPO at a buck per share. That was in March.
By November it hit a high of $3.90. That was a 290% rise at that point for anyone in on the stock from the get go.
Ecofibre sells products based off a compound called CBD, extracted from the hemp plant, that users believe brings a health benefit.
Regardless, anyone with a brain knew the stock was way overvalued at $3.90.
A near billion-dollar market cap was a bit rich for a stock with under $50 million in annual revenue.
Ecofibre began to go down as reality caught up with the excessive optimism. The COVID-19 crisis kicked it in the guts further.
It made a low of $1.24 on 24 March — a 68% decline from its previous all-time high.
It released its quarterly report this morning. The stock market gave the business a pass — it’s up over 10% in today’s trade and over 20% since the low point in the last week of March.
One reason is that you could say Ecofibre is one of the ‘lucky’ companies.
Most of its products are sold via independent pharmacies in the US. These remain open despite the general lockdown happening for a lot of other businesses.
Also note that people usually take CBD products to treat anxiety, depression and pain. The economic distress is raising these problems further.
I thought about trading Ecofibre before the announcement but decided against it.
It’s not COVID-19 that held me back, but the current ultra competitive and poorly regulated CBD market. The danger is Ecofibre may suffer as firms slash prices to compete for market share.
The quarterly report this morning shows Ecofibre’s revenue was down from the last quarter.
But it remains hopeful of building a profitable and growing business ‘in the medium term’. Investors seem happy to go along with this for now.
Personally, because Ecofibre is not profitable, I want to see revenue growth start growing again before buying.
But it’s got some nice fundamentals in place, so don’t be shy about sticking it on your watchlist. I would expect it to be trading around a similar level today by the time the next quarterly update is due.
Editor, Profit Watch