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MARIJUANA Stocks in 2019 - The Future of Cannabis Stocks - YouTube
Channel: Learn to Invest - Investors Grow
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Hey YouTube. I'm Jimmy in this
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video. I'm going to go through what
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I believe to be the future of
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many cannabis stocks.
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Now I recently published a video
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called Three my three favorite
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cannabis stocks for 2019.
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You can see a link to the
description below for that
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video
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and the premise of that video
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was that I chose companies
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that I believe had a chance to get
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bought out at a premium to the
current
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stock market price
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and that still remains true.
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I truly believe that the best
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way to make money in this industry
right now
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is buy companies that get bought out
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for a premium for the companies
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that don't get bought out.
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I fear the worst.
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Let me illustrate my line of
thinking.
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So here's a list of some of
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the more popular cannabis stocks.
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First we have canopy growth that
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we have TilRay,
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Aurora,
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Cronus,
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Aphria, MedMen,
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OrganiGram.
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Companies like that now listed these
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companies by market cap.
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Here's each of their market caps
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and the largest is Canopy growth
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and the smallest on our list is
OrganiGram.
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Now this is where things get
interesting.
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Over the past four quarters
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canopy growth has generated
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about 94 million dollars
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in revenue
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and tilray has generated
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about 40 million dollars in revenue.
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Okay not bad Aurora put up about
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77 million Aphria put up about
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57 million medmen had 40
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million in 2018 OrganiGram did
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about 22 million.
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Now this is crucial because
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they've been talking about profit.
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I'm talking about revenue
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and if we do some simple math we can
see
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that if we take the market cap
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and we divide by revenue what
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we end up with is the price
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to revenue ratio the amount also
here
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called Price to Sales.
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Same thing. Now typically I don't
really like
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using price to revenue as a way
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to value a stock because when
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we use it well we're leaving out
important
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things that are necessary to
properly
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value a stock things like
profitability
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or margins
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or growth
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or all other important factors
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needed to properly value the stock.
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But I do think that price to revenue
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can be decent when
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the industry that you're looking at
isn't
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profitable and that's true for the
cannabis stocks
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on this list. At least most of them
aren't profitable.
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Now this is also true for
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the technology companies back in the
dot com
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bubble. Least most of them
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or railroad companies.
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Going back to the 1880.
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Back then rail road companies
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where the hottest investment anyone
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could make.
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They were changing the country they
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were literally changing the
landscape
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and their stock prices showed
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the very same thing.
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Well within a few years the
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initial investments made were
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virtually wiped out for all
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of those early investors
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in that what turned out to be a
bubble.
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Now we still have very companies
today
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and many of them are considered to
be some
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of the most solid investments you
can make
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today.
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But if you were the initial investor
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in those companies you would have
gotten crushed
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and the technology stocks before the
dotcom
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bubble were the same way in
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that many of those companies were
not profitable.
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They had limited revenue yet
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they traded at a multiple
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significantly higher than the
revenue
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that they were generating.
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Many of the companies back then
traded
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that 20 30 50
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or 100 times revenue.
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And to put that in perspective right
now
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the S&P 500 has an average
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price to revenue ratio of about
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2x.
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This means that if a company has a
billion
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dollars in revenue well they should
be worth about
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2 billion dollars now.
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2x is just the average for
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all the companies and the S&P 500.
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Obviously not all companies are
trading
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their Amazon as an example
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is trading a bit over 3x
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AliBaba trades that a bit more than
6x.
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And this brings us to the problem
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and to the opportunity for cannabis
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stocks.
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First the problem
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and I think that this may be fairly
obvious
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these companies simply should
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not be trading this far above
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revenue. That's not to say that they
can't trade
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up here. Obviously they can.
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They're doing it right now
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and some of them have even done
quite well
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tilray for example
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over the past year is up more
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than 300 percent
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but it won't stay this
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way forever and just like the dot
com bubble
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or the railroad bubble
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or any other bubble that prices
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companies so far above revenues
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and many of these companies aren't
even profitable.
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While every overpricing
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like this eventually corrects
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itself.
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Now I give you the fact that
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many of these companies have
fantastic
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growth.
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So it would be crazy to
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think that they should be trading at
the same multiple
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as the S&P 500 companies.
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Also the reason why you don't use
price revenue.
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But they should certainly be
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trading at some comparative
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number. So let's say they deserve a
price to
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revenue multiple of about 10x.
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That's still a bit high.
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But do the growth
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and the excitement around the
industry.
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I can make a realistic case for
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the fact that 10x is a reasonable
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number. Well that would mean that
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canopy growth instead of trading at
forty
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six dollars a share.
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Well that should be trading at about
three
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dollars a share.
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TilRay should be trading at close to
four
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dollars a share.
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Instead of the 80 dollars it's
currently trading
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at Aurora will be
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trading at just under a dollar a
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share instead of the eight dollars a
share
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it's currently trading.
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Now I recognize that for those
people who are
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excited about these companies
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and what the legalization of
marijuana
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could mean from an investment
standpoint
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I understand that there's a certain
amount of excitement
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there but I think it's important
remember that if we're going
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to invest that we need to put
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this type of investment in its
proper
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bucket. And that is
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what called the chance bucket
because
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it's possible that every one of
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these companies doubling the stock
price
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over the next year.
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But it's also possible they get cut
in half.
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It's also possible they could cut by
90 percent.
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The tough part about these types of
companies is
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that often the direction of the
stock is
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not driven by company performance.
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Instead it's tied simply
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to investor excitement
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and investment excitement
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never stays.
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There's never been stock market
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excitement that has stuck around
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indefinitely.
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All things eventually pull back.
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Now I'm not saying that money can't
be made in cannabis
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stocks but in my opinion
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the way to make money
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with these types of stocks is to
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wait for them to get a big
investment from one
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of the huge companies.
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Now we already saw that when
Constellation Brands
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took a big stake in canopy growth.
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Canopy growth saw a big jump in
their stock price.
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Well this type of investment
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often makes Canibus stock
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investors feel much better.
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After all Constellation Brands a 32
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billion dollar company they are one
of the dominant
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players in both the wine market
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and the beer markets all over the
globe.
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Well they're not the only ones.
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Back in December the 91 billion
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dollar company Altria
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took a, there a cigarette company.
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They took a stake in Cronos.
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And here's a stock chart
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for Cronos.
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And this right here this is when
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Altria announced the acquisition
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and if we were investors in a
cannabis
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stock well this is what
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we're after back in November.
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Cronos was trading at about ten
dollars a share
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and in early February they
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are trading nearly 30 dollars a
share.
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That's a triple of your money.
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If I had invested in this company
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if I'd invested in Cronos any time
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before November I'd take my profits
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right now and running because this
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is unlikely to keep happening for
any
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one company.
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And I think that it's important for
us to remember
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that just because
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these huge companies are
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buying cannabis stocks at crazy
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high valuations that
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I think it's important that doesn't
somehow
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justify the valuation
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or validate our belief that these
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are good buys.
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They may be very good companies
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but not at this price.
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Companies like Constellation
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Brands are Altria
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or no were no more immune
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to the hype than everyday
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investors like you and I
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take Mark Cuban's broadcast.com
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As the perfect example.
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Mark Cuban sold broadcast dotcom
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to Yahoo right before the tech
bubble
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burst for about five point seven
billion
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dollars. A few years later
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Yahoo shut it down
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and the investment was almost a
total loss
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for Yahoo.
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So my point is that just because
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an enormous company is overpaying
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for a stock doesn't mean that we
should.
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Especially if that company
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isn't profitable because let's face
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it profitability is what we're
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after as a company it's what we're
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after as investors.
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So how am I personally going to
invest in cannabis
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stocks. Well for me I'm sitting
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on the sidelines my money is too
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important to me to invest in
something
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that sure it's growing at an awesome
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rate but it's way overvalued.
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I'm just going to sit here on the
sidelines
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and win the cannabis stock bubble
bursts
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and it will.
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Well when it does I'll
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be there to pick up Aurora for
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a dollar a share
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or two dollars a share
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or whatever the company might be.
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You'll be at a significant discount
to where
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it's currently trading unless
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they get bought out.
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Now if we feel we have to be in the
stocks
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right now how should we play it.
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Well first off we need to
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stay diversified.
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Maybe we can find a few of these
companies that we like
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and then we try to identify the
companies that we
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think will get bought out.
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The three companies that I mentioned
in
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my favorite marijuana stock for 2019
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video was OrganiGram
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Aphria and canopy growth
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canopy growth already got huge
investments
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from Constellation Brands.
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But I'm hoping that they get a pop
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when constellation comes in
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and buys out the rest of them.
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I'm hoping that right now
constellation has the option
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to buy the rest hoping that happens
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and could pop the stock higher.
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And maybe we'll get lucky
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and end up with Constellation stock
if you
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start to buy all the rest of the
company.
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And with OrganiGram
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and Aphria well I
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thought that they could do well as
part of a
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larger company.
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I think that they would make a nice
fit there
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would be a good acquisition
candidate.
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But once again we need to keep this
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as part of our speculative holdings.
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This goes in our chance bucket the
shouldn't
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be big holdings
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and I don't want to offend anybody
who
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loves these stocks.
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And up until this point investors
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in cannabis stocks have been right
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many of them have moved higher in
some cases
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much higher.
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But it won't stay this way in
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investing.
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Everything must eventually come back
to
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the averages.
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And when that happens
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many of these stocks are going to
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get creamed.
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So if I owned Cronos
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today we'll be selling right
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now. I would take my profits
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and walk away.
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And if we happen to
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own a stock or cannabis stock that
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does really go to get some good news
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and gets a nice jump in the stock.
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Well I would sell right then
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and walk away because eventually
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like I say these stocks are going
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to get priced like every other stock
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in the market. So I'm sorry if I
offended anybody
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with my point of view.
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Hopefully you found this interesting
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and even if you don't agree
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with me let me know what you think
in the comments
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below and if you haven't done so
already
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hit the subscribe button.
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Thank you for sticking with me all
the way into the video.
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Good luck out there and thanks I'll
see
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in the next video.
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