These are your three keys to once-in-a-lifetime gains in cannabis stocks…
The raucous din of a thousand shouts hit me first. Then the sharp smell of sweat.
Next, the crowd came into focus.
Bright jackets of every color and pattern coated the room as I entered. All of them jammed together, flowing over elevated platforms, up past the bleachers, and covering every inch of the floor.
A meandering kaleidoscopic landscape of brightly colored cloth filled my view, complete with rolling hills, valleys, and even cliffs.
Every one of those jackets was on someone. Some ran about. Others furiously waved their arms. A few on the outskirts held three, even four telephone handles at once, while they franticly switched between conversations. And most of them were screaming at the top of their lungs.
Considering the incredible size of the crowd spilling across the room, this had to break a fire code or two.
No, this wasn’t some psychedelic trip. Nor was it a concert.
This was my first day on the bond floor of the Chicago Board of Trade. Fresh out of college and with a thick Okie accent, I couldn’t have been more out of place.
Twenty-six years have passed since those first trepid days on the trading floor. And my experience from the bond floor drives the way I look at investments even now.
When I look at the cannabis market today, I see three powerful tailwinds sweeping across the cannabis market that point the way to once-in-a-lifetime gains in cannabis stocks.
I’m talking about a chance to return 10 times, 20 times, even 30 times your money.
And these tailwinds are so strong that you could be putting those gains in the bank by as soon as the end of next year…
No Room for Manners When “Time is Money”
My months on the trading floor were a crash course in economics, trading, and the complex math of finance all in one.
I also learned a thing or two about how little room there is for country-boy politeness in the aggressive world greasing the wheels of global money flows.
My first job was as a “Runner.” I made all of $7.50 an hour running slips of paper from the phone banks bordering the room to the “Traders” standing in the pits. There were hundreds of us coursing through the “valleys” between the pits and phones. We weren’t all men, and we all had to fight our way through.
After a week of stepping aside to let the ladies pass while saying “pardon,” I realized I better charge my way through – courtesy be damned – if I wanted to keep my meager income and my chance to move up the food chain.
Manners took way too much time. And “time is money.”
In fact, “time is money” forms the foundation of finance. It’s also a big driver of returns for almost any type of investment. Stocks, bonds, currencies, commodities, real estate, derivatives, you name it – their prices move up and down all because of the effect of time on the value of tomorrow’s money today.
The combined effects of that hard fact, alongside two other fundamental truths, are not just tailwinds, but rocket fuel.
And you now have the perfect conditions for a 10X-plus cannabis rocket ride.
5X Top-Line Ignition
The first fundamental truth is the power of revenue growth.
You’ve heard me talk about that a lot because the revenue growth in store for cannabis companies is absolutely hyperbolic.
I repeat it often because it’s half the reason why cannabis stocks provide such a unique opportunity for individuals to get in on the ground floor of a spectacularly high growth industry.
Today’s $15 billion legal cannabis market cannibalizing a $65 billion black market will grow industry revenue at 35% to 45% per year. That rate doubles the market twice in three years.
You would be hard-pressed to find this type of revenue growth in any other industry.
And because 80% of any market goes to the top 20% of players, the most dominant cannabis companies’ top-lines will grow at more than twice that rate.
That shoots revenue for those at the top five-times higher in three years. And that makes for a strong driver of stock returns.
(I should note that targeting the companies that could give you the best returns is no easy task. So, if you’re looking for recommendations, you should check out my list of top stock picks right here.)
Not even considering the other tailwinds, five-times more revenue translates to stock prices five-times higher from current levels thanks to this one fundamental force alone. That means every $1,000 invested becomes $5,000. Every $10,000 becomes $50,000.
And since the market is forward-looking, it won’t take five years for those stock prices to get there.
But that’s just the start.
To that, we get a compounding effect as a bigger share of those top-line revenues flows all the way down.
And, “Bob’s your uncle,” that bottom-line boost will shoot that 5-times gain to 20-times before you know it.
A 4X Bottom-Line Booster
Companies have invested a lot today to capture the revenue they expect tomorrow, which means a lot of revenues get eaten up by expenses.
But that’s changing quickly. The tough capital markets cannabis companies faced last year, plus the COVID-19 shutdowns, forced many players to clean up their act.
Cannabis companies are performing better. Expenses are more in line with revenue. And cannabis stockholders are starting to see the results.
Nine months ago, a mere $2.40 of every $100 earned by Curaleaf Holdings Inc. (OTC: CURLF) made it past the gauntlet of corporate expenses. Today, nearly $18 makes its way through. That’s a 7.5-times boost in performance.
And this improved performance by management teams merely hints at what’s in store.
Given the progress the top cannabis players are making with their performance, I expect that, over the next year, every $10 flowing to the bottom-line today will grow to $40. And that four-times improvement in performance means a four-times boost to stock valuation – turning your five-times gain from revenues alone into a 20-times gain.
Suddenly, every $1,000 is now $20,000.
And here is where “time is money” really comes into play.
2X Escape Velocity Into Orbit
Stock prices reflect the money investors expect a company to make in the future. And the less certain they are about how much money that will be, the bigger the discount they put on that money.
Call it an “Uncertainty Discount.” And uncertainty increases with time.
Investors currently place a big Uncertainty Discount on cannabis stocks.
The status of federal legalization has them tripped up. The best management teams are just now showing what they can do to a company’s performance. And the entire industry is still in the earliest stages.
I estimate that discount is easily four-to-six times higher than investors “charge” most other stocks. But as revenues become more certain, as more states go recreational, as investors realize that the cannabis industry is under no threat from the federal government – with or without legalization – uncertainty falls as well.
As the Uncertainty Discount falls, every dollar a company makes for investors becomes more valuable – especially those dollars expected further out in the future.
Just cutting that Uncertainty Discount in half can drive the value of a dollar received up anywhere from 50% to 80% in 5 years.
So, going back to our example, that $40 investors expect to receive from improved management performance in the future is now worth a lot more. And new investors will gladly pay a higher price to get it.
So, that $1,000 initial investment that went to $5,000 on higher revenue, then went to $20,000 on better performance, is now worth $37,000.
Drive that uncertainty discount all the way down to what other stocks receive, and that $20,000 becomes almost $58,000. Or $580,000 when your initial stake was $10,000.
This multi-force compounding effect – 5-times, 4-times, nearly 2-times – leaves you with 50 to 60-times your money.
And that’s the type of performance that the Big Money players see in store for cannabis.
See These Forces Work for Yourself
Time is money. But it’s not the only moneymaking fundamental force.
And all that I’ve learned in the years since I first stepped onto that hectic trading floor in Chicago show me that, right now, revenue growth, improved management performance, and increased certainty are all converging on cannabis. That adds up to a rare money grab that comes around once, maybe twice, in a lifetime.
To see for yourself just how powerfully these forces work together, check out my Deep Dive on Jushi below. You have to pick your spots in cannabis, and Jushi has some key pieces set in some very valuable spots.
Executive Director, National Institute for Cannabis Investors
4 responses to “How to Return 30X Your Money in Cannabis Stocks by Next Year”
September 29 2020