There is a reason the adage “you get what you pay for” exists. Dozens of financial information websites put out a lot of misleading information, especially when it comes to cannabis companies that are new or making a lot of deals.
The National Institute for Cannabis Investors team and I are here in Las Vegas right now for the biggest cannabis show on the planet: MJBizCon.
When this many people from one, fast-growing industry are all in one place, there are definite A-listers and genius-level up-and-comers around. And I’m talking to them while I’m out here for the week. Our access to these people helps paint a picture of where things are going in the most exciting industry out there today.
That said, you also get a lot of the folks that don’t bring as much to the table beyond hype. Walk the halls of this convention center (and many like it) and you’ll find a dozen people who claim to make “the best” grow lights or packaging materials or compliance software and on so. And they rarely have any evidence to actually back up their claims.
It’s just free information. So, there’s just a lot out there to sift through. Of course, that’s part of why the Institute and Cannabis Profits Daily exist — we do that for you.
All of this reminds me of financial data available on the internet.
In a way, individual investors have never had it so good. Financial information websites such as Yahoo Finance, Google Finance, and Bloomberg put out a lot of information – everything from stock prices to financial ratios to statistics is right there at a push of a button. And it’s free.
But there is a reason the adage “you get what you pay for” exists.
Within many financial data sites, that’s definitely the case.
The dozens of websites in this space put out a lot of misleading information, especially when it comes to cannabis companies, many of whom are new to public exchanges.
Here’s an example of misinformation that can cost investors thousands of (or more) dollars every year…
What You Are Really Paying for That Stock
Without the context, knowledge, or, perhaps most importantly, the time to tease out good information, decision-making in the stock market can get pretty clouded.
Facts are difficult to parse, and the fiction that emerges can lead you in the wrong direction.
The sheer amount of misinformation floating around out there was a big part of why we launched the National Institute for Cannabis Investing. When our team first started researching the wide universe of cannabis stocks, we were shocked at the poor state of information about them.
So we spent months pulling together our own stock database, which we call NICILytics, as well as the most powerful cannabis investing tool on the market. It’s so investors like yourself could have access to the accurate information you need to make smart moves in the stock market.
None of this was easy – a lot of resources went into this – but the Institute’s work can help alleviate some of investors’ biggest headaches.
One data point that can be particularly misleading and problematic on the free sites is the number of stock shares issued by a company.
Our analysts pay close attention to this number because stocks are a claim on earnings. Without an accurate count of those claims, you don’t know what share of the company’s earnings – or how much of the company – you actually own.
In other words, without an accurate share count, you don’t know how many hands are in the cookie jar.
Companies issue stock for many reasons including the following:
- To early investors who provided capital to the upstart company
- To the executive management team as a form of compensation and incentive.
- To investors who bought stock when the company went through the initial public offering (IPO).
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The count of the number of shares a company has issued to stockholders is called “shares outstanding.” In addition to understanding a stock’s share of the earnings, shares outstanding shows you how expensive or cheap a company really is.
An accurate estimate of shares outstanding is critically important to know before buying – it lets you know how much you are really paying for that cannabis company.
That’s because shares outstanding feeds into the calculation of a company’s market cap. And market cap is the value placed on the company by the market.
For example, if a stock is trading at $10 per share and the company has 100,000,000 shares outstanding, multiply one by the other, and you get the market cap. In this case, it’s $1 billion.
What this means is that anyone that pays $10 for that stock is effectively stating the company is worth $1 billion, whether they realize it or not.
And most financial websites aren’t focused enough on this new industry to keep up to date on the numbers as they’re rapidly changing…
The Number to Watch Closest Among Fast-Moving Cannabis Financials
Cannabis companies are raising tremendous amounts of capital by issuing stock all the time. They are also making acquisitions, forging supply deals, paying for talent. And it’s often with newly minted shares of stock.
For some small or poorly run companies, management pays for almost everything in stock. At the Institute, we joke that some companies even pay the pizza guy in stock. You definitely don’t want your money in companies operating like that.
My point is that share count can increase dramatically over three months for cannabis companies.
You may think you’re buying a company at a relatively low market cap – meaning you’re getting a good price for the stock. But you could be paying for a much more expensive company because there are far more shares issued than you know.
The stock that gets issued to pay management, buy companies, or raise capital during a quarter isn’t the only stock to consider.
The company could also be on the hook to issue stock in the future.
And sometimes that commitment is uncomfortably large – and certain.
Companies obligate themselves to issue stock through instruments like options, warrants, and convertible debt as well as employee compensation.
In the end, when these shares eventually get issued, they dilute the value existing shareholders have in the company. That’s because more shares are now spread across the same capital base and earning potential.
Earnings get “diluted” across more shares.
That’s why the number we care about most is the “fully diluted shares outstanding.”
This number includes not only what the company has issued, but also shares it will likely issue in the future through things like stock option plans, warrants, or convertible debt.
To see why an accurate share count is important, let’s look at a popular cannabis company – MedMen Enterprises Inc…
Few Sources Provide Accurate Information
According to one of the most heavily trafficked financial information websites, MedMen had a market cap of CA$550 million on November 7. This was based on a share price of CA$7.78 and shares outstanding of 70.8 million shares.
Our research team at the Institute estimated that MedMen is easily on track to generate CA$130 million in revenue over the coming year. At that revenue estimate, a CA$550 million market cap is only four times revenue.
That is quite inexpensive for the high-growth cannabis industry.
So, if CA$7.78 per share equated to a CA$550 million market cap, then CA$7.78 for MedMen stock looks like a good buy.
However, the website in question based the 70.8 million shares outstanding on financial statements released on June 30. Even then, it wasn’t accurate.
That’s because MedMen has several entities with cross-shareholdings that this website’s analysts missed.
When we started looking into the financials, we saw the true picture.
MedMen’s shares outstanding was actually well over 400 million at the time. Add in all the shares issued through transactions subsequent to June 30, and shares outstanding exceeds 600 million.
Also consider the promises to issue stock through warrants and options that will dilute earnings in the future, and you see that the fully diluted shares outstanding was heading north of 650 million shares.
At a share price of CA$7.78 per share, this far more accurate share count means the market is effectively valuing the company at CA$5.1 billion.
This is almost 10 times higher than what the other website I’m quoting shows.
That’s not to say MedMen will not get to $500 million in revenue, or even far beyond. But, when buying the stock, investors like yourself deserve to know what you are really paying and how many other hands are in – or are going to be in – the cookie jar.
The importance of an accurate picture of a cannabis company’s valuation can’t be overstated. Again, it’s one of the driving forces behind what we do here at the Institute.
Our sole mission here at NICI is to lead cannabis investors in the right direction – to be your go-to source for cannabis investing. Through our NICILytics stock database, members of our Elite Membership Tier have access to the world’s most complete database of cannabis stocks.
Inside, our proprietary database allows you to search and filter top cannabis stocks. You can access a complete overview of their operations, organize companies by sub-sector, and see the countries in which they primarily operate at a glance. Because of painstaking, focused research, it provides the most current information in the industry. You can even see how we think the top cannabis companies stack up to each other based on our analyst ratings.
This all helps you, the investor, form a much clearer picture as to what you’re actually getting when you buy a cannabis stock. And it’s all right at your fingertips.
Thanks for being an important part of the National Institute for Cannabis Investors,
Executive Director, National Institute for Cannabis Investors
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8 responses to “Investors Are Losing Thousands By Looking At These Misleading Numbers”
November 15 2018