This week, we take a look at what will happen when the giants drive stock prices higher, price to book ratios, and more.
Welcome to another edition of our weekly member Q&A.
Earlier this week, I went a little more in depth on a topic one of our readers asked about: how to handle market downturns.
As you’ll remember, our advantage as cannabis investors is knowing how the story ends.
Our first question today is about what we’ll do when we get to the end of that story.
Cheryl K. asks: “Once Cannabis is legal in the US, and corporate giants jump in with fierce vigor, what impact will this have on current NICI IPO Member Investors, and our stock investments? In other words, will the giants drive stock prices so high that selling and purchasing will become difficult for your members? Also their impact on those joining NICI?”
Cheryl, I sure hope current prices are driven up! In fact, that’s one of the main reasons we created the Institute.
I do think that once cannabis is completely legal in the U.S. things will happen exactly as you say. Giants will jump in and buy many of the largest and best cannabis companies. Giant investors will run up the stock prices of anyone not purchased outright by a strategic investor. The people who are investing now will make a lot of money when those giants start to arrive.
Would that mean the end of NICI? Not by a long shot! There will still be plenty of opportunities among companies who resist selling and among new entrants. And it could be that one or more cannabis companies will buy a giant itself!
Our strategies may shift as we progress through the phases I’ve discussed, but the Institute will always be here to help you play the cannabis markets for the best profit potential imaginable.
Make sure you know how to get every recommendation I ever put out for our Cannabis Investor’s Report members.
Speaking of those recommendations, our next question comes from a reader who wants to know how to interpret the trade alerts I send out.
Wallace N. says: “When you say, ‘Buy a 25% stake…’ I’m supposing you mean that 25% of our entire trading money you are advising should be placed into that security. Advise if I’ve misunderstood or misconstrued your statement.”
Wallace, I appreciate the opportunity to clear that up. No, you should not put 25% of your entire trading money into a cannabis stock – or any stock, for that matter! When I recommend establishing a 25% or 50% or 100% stake, I’m indicating how much money you should put in as a percentage of what you personally have decided to put into a normal position in a cannabis stock.
An example might help here. Suppose you’ve decided that you’re going to put 10% of your investible assets into cannabis stocks. And you’ve decided that you’re willing to own up to 10 different cannabis stocks. Both of those numbers depend on your personal investing situation: how much capital you have, whether you’re still earning or you’re retired, what your risk tolerance is – all the kinds of things I can’t know about you.
But in this example, that means that you’d be willing to put 1% of your investible assets into any single cannabis stock. So if I recommend that you establish a 50% position, it means you’d buy half of one percent’s worth of your investible assets into that stock. Usually I do this to keep all of us from making the stock go up too far.
When the stock settles down I’ll usually recommend putting a little more in, until you reach a full position. In this example that would be 1% of your investible assets. From time to time I’ll recommend that you only establish part of a position and keep it there. That happens with smaller stocks or with especially risky situations. And from time to time I may recommend that our members establish an unusually large position – I haven’t done it yet, but there may come a time when I recommend that whatever you’ve decided is a “normal” position size for you, you might invest even more than that.
To close out this week, I’d like to address a complex question another member posed.
JG asks: “Can you go into some detail for your readers on the ‘price-to-book ratio’ of some of our companies? Maybe explain why share price gyrations may not be such a source of anxiety if Linton’s balance sheet has some staying power. Didn’t he say it was too clean?”
JG, you’ve got a few separate questions there, all of which deserve answers. The first is about book value and price to book. A company’s “book value” is simply the sum of its assets minus its liabilities. And the price to book is the book value divided by the number of shares as a ratio of the price. This used to be an important metric – how much more should you pay for a company over the value of its assets?
But the truth is that several decades of practice at accounting manipulations mean that this is less useful than it used to be. If I’m looking at an old-line industrial company, I still look at price to book. Banks, too. But to pick one example, a company’s R&D is expensed – it doesn’t contribute to book value. Apple has spent nearly $37 billion on research and development over the past three years alone, and not a cent of that went to book value even though it created enormous value for the company. So Apple trading at 10 times book doesn’t bother me a bit. The same is true of cannabis companies. There’s goodwill, there’s written-off goodwill, there’s a provision for the value of biological assets – basically, growing cannabis plants, there’s all kinds of things going on that make the calculated book value all but worthless.
The second is about Canopy Growth (NYSE: CGC) and share price gyrations relative to the book value. Again, since I don’t think a lot about book value, I don’t really look to the company’s assets as a measure of value. Look instead to revenues and, when they start to occur, cash flows. In the long run, the value of a company is a function of the net cash it can generate for shareholders over time.
Finally, you ask about Canopy CEO Bruce Linton’s comment that his balance sheet is too clean. That just means he wants some debt and some leases in there to free up cash for future investments. He’s right. A CEO’s job is to have every asset on that balance sheet work as hard as it can. The fact that a CEO with billions of dollars of cash realizes this and pays attention to it is a sign of his talent.
That’s exactly why Canopy Growth is a core holding in our Cannabis Investor’s Report model portfolio. It’s a great company that truly has a place in every cannabis investor’s portfolio.
If you haven’t already, take a moment to read our special report on three more cannabis stocks to buy now.
I’ll be back early next week to talk about an exciting move from one of the biggest names in clothing.
I’ll see you then.
Executive Director, National Institute for Cannabis Investors
One response to “Q&A: What Happens When Giants Drive Prices Up?”
May 18 2019