No time for long-winded discussion. So let me get right to the point …
Yesterday was the big day of our Urgent Cannabis Stock Briefing, and the response was the biggest we’ve seen to any briefing we’ve done in years. The full video recording is available now. But it’s coming offline very soon. So, I strongly recommend you watch it as soon as possible. Click here, and it will immediately begin playing on your screen.
Today, due to the China trade confusion, all stocks are down, cannabis included, opening up some great buying opportunities. And …
Tomorrow, I’m jumping on the opportunity to buy the best of the best. I’ve been whittling my pencil down, looking for bargains. And you know what? Bargains are very rare indeed in the cannabis space. So you gotta grab ’em while you can.
Here’s a list of the largest (but not necessarily best) cannabis-related companies by market cap …
A quick explanation of some key terms …
- Enterprise Value (EV) includes not only market cap but also short-term debt, long-term debt, and cash on the company’s balance sheet. A good measure of a company’s overall value.
- Enterprise value/sales shows how many dollars of EV are generated by one dollar of annual sales. In this case, the estimated annual revenue in the next four quarters. Generally, the lower the ratio, the cheaper the company is.
Even without industry comparisons, you can see some of these are very high. Canopy Growth (CGC), probably the best-known cannabis stock, trades at a price-to-sales of 37.78. Cronos Group (CRON) trades at 112.7x earnings.
Do they have good reasons to be valued that high? Some do, for sure. For example …
- Cronos saw its revenues grow 250% year-over-year.
- Canopy Growth’s revenues jumped 283%.
- GW Pharma’s (GWPH) revenues jumped an astounding 1,191%!
Plus, the amount of cannabis they’re going to grow is also a factor. Canopy Growth is well on track to growing 500,000 kilos of annual yield. Aurora Cannabis (ACB) leads the pack, though, with a jaw-dropping 700,000 kilos in projected annual yield.
Now, here’s where I tip over the table, and scatter your preconceptions all over the playground …
Stop thinking about cannabis companies in terms of how much pot they can grow.
Sure, it’s nice that production is booming. That is driving revenues. But when I was recently at the Benzinga Cannabis Conference in Toronto, one phrase that was on everyone’s lips was “the commoditization of cannabis.”
Cannabis is a weed. It sure grows like one. Canada may be reporting shortages now, but you can bet a surplus is coming.
So why are these stocks so “expensive”? I can think of three reasons.
#1: A Merger-and-Acquisition Wave is Coming. We’ve already seen the larger cannabis companies gobbling up smaller or ancillary companies like a bunch of schoolkids gobbling up Goldfish crackers (or CBD Oreos).
And there have been a few big, non-marijuana-focused companies making strategic investments in cannabis growers. Like when Constellation Brands invested $4 billion in Canopy Growth. An investment that is paying off handsomely, by the way.
But many more big companies are cooling their heels, waiting for the U.S. government to make cannabis federally legal. They don’t need the headache of investing in a product you can’t ship across state lines.
When legalization comes, you are going to see a corporate stampede into pot that will look like the running of the bulls.
#2. New Tech is Coming. I’ve written a couple of columns about the new tech that will reshape the cannabis industry. Microencapsulation, which is going to trigger a cannabis culinary explosion. Geo-modifiers, or making THC quickly and cheaply from genetically modified beer yeast. And more!
Some — not all — of those “overvalued” companies are on the cutting edge of this new tech. Far-sighted investors can see the big payday coming.
#3. Wall Street Cash. Here’s a fun market fact: Away from cannabis, about 82% of the average stock is held by some kind of fund. But in the cannabis space, that number is MUCH smaller. Like the big corporations, many funds are waiting for legalization before they dive into the pool.
Investors can see that. And they know that when the “all-clear” is sounded, many funds will have no choice but to buy cannabis stocks. At any price. So, those valuations may be high … but they can go a lot higher!
Be Careful Out There
The cannabis market can be very tricky. There are companies that are destroying shareholder value. Companies I wouldn’t touch with a 10-foot pole. But there are also undiscovered gems waiting to be picked up. And there are solid thoroughbreds that aren’t just winning today, but making all the right moves to win tomorrow.
I’ll do my best to guide my subscribers to extraordinary gains. And if you’re on your own, just be sure to do your due diligence when hunting for bargains in the marijuana patch.
All the best,
Sean
