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