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The marijuana sector is in the middle of a tough pullback. Are you taking advantage?
In the pantheon of “horribly inaccurate” predictions, a few stand out as especially fantastic …
In 1962, an executive for Decca Records chose not to sign The Beatles, saying “the Beatles have no future in Showbusiness … Groups are out; four-piece groups with guitars, particularly, are finished.” Decca signed “The Tremeloes” instead.
Then there was Steve Ballmer, CEO of Microsoft … Just months before the first iPhone was released in 2007, Ballmer said “There’s no chance that the iPhone is going to get any significant market share. No chance.”
Or we can look to Ken Olsen, president and founder of Digital Equipment Corporation, who famously said in 1977, “There is no reason for any individual to have a computer in his home.”
One more great one from a bit further back …
The president of Michigan Savings Bank advised Henry Ford’s lawyer not to invest in Ford. Why? Because “The horse is here to stay, but the automobile is only a novelty, a fad.”
It was five years ago that our own Matt McCall, editor of Investment Opportunities, found himself on the receiving end of a prediction that turned out to be equally inaccurate
Sitting across from the “experts” on the Fox Business Network back in October of 2014, Matt made his case for investing in marijuana. He believed that after being banned by the government for decades, marijuana was about to enjoy a wave of legalization, which would create giant wealth-building opportunities for those bold enough to act.
The response from the Fox Business experts?
You’d be better off owning the makers of Frito-Lay and Doritos.
The ensuing years have proved that dismissal laughably wrong. Since Matt’s prediction, dozens of cannabis stocks have appreciated more than 1,000%. And a handful of the biggest cannabis stock winners have soared more than 5,000% — or enough to turn a $25,000 stake into $1.27 million.
Of course, if you’re a marijuana investor, you’re all-too-aware that the sector has been hit hard since this past spring
To illustrate, below is the Alternative Harvest ETF, “MJ.” Given its broad exposure to many popular marijuana stocks, it’s a loose proxy for the marijuana sector.
As you can see below, marijuana stocks began 2019 with a bang, rising 55% through mid-March, compared to the S&P’s 13% gain.
But what’s happened since then?
Well, while the S&P has grinded 6% higher, marijuana stocks have suffered a big pullback. MJ is down nearly 50% as you can see below.
This has led to some gleeful “see, I told you so” schadenfreude from the anti-marijuana camp.
So, where are we today? Which prediction will prove to have a future home in the pantheon of bad ideas? The one claiming that the marijuana market is a fad, and destined for failure? Or the one arguing that marijuana demand will skyrocket as legalization spreads, opening a new, fully-legalized industry, resulting in billions of dollars of investment wealth over the coming decades?
Well, no shocker here, but we’re big believers in the future of legalized marijuana, as well as its potential to make wise, long-term investors huge returns.
Today, let’s turn to Matt McCall for another reason why we believe this to be true. As Matt wrote in his October issue of Investment Opportunities …
We are once again at a critical moment for investors bold enough to act … I want to be sure you know why the cannabis industry still has a huge amount of growth ahead of it. I also want you to understand why right now is a time of both great opportunity and great danger in the cannabis sector.
Most of all, the past five months have given us an incredible gift as investors. We’d be wise to accept it, and I want to help you do that by pointing you to the top buys for your money right now.
***Mastering the emotions of investing
Last week in the Digest, we highlighted the “Peak Performance” series from Louis Navellier. It tackled the psychology behind investing, shining a spotlight on the most common “behavioral finance” blunders that trip us up and result in poor investment returns.
In the October issue of Investment Opportunities, Matt touched on this same behavioral challenge. From Matt:
I learned early on that in any long-term, high-growth trend, investors will swing from wildly optimistic to excessively pessimistic. If you look back in history, it’s like clockwork – the trends soar over the long-term, but there are tons of short-term swings both up and down along the way.
I compare the swings to a pendulum. The pendulum on a clock swings from side to side, but at a rhythmic pace. Rallies and sell-offs in a high-growth trend are less rhythmic, but you can count on them like clockwork — pun intended.
As you can see in the graphic below, the cannabis pendulum swung to the extreme right earlier this year when stocks hit new all-time highs. Now look at today. The pendulum is at the extreme left, suggesting stocks are oversold and undervalued.
Matt goes on to tell us that the long-term growth story for marijuana hasn’t changed a bit. It is exactly as it was in March. The only difference is that most stocks trade at half the price they were six months ago.
And as Matt tells us …
That’s the definition of a buying opportunity.
***Marijuana valuations have gotten cheap
So, anyone can say that something is a good buying opportunity. But what do the numbers say?
One valuation metric that Matt points toward is the forward price-to-sales (P/S) ratio. This ratio compares expected future earnings to price of a stock or index.
At the time of Matt’s issue, the current P/S ratio for the S&P 500 was about 1.96 — which means the index is valued at nearly twice the projected sales of the combined companies in the next 12 months. That is a little above the historical average for the S&P 500.
Matt then went on to look at the P/S ratio for four of the largest cannabis companies based in the U.S. As you can see, all four trade at a major discount to the overall market.
Here’s Matt for the takeaway:
Add in future growth of the cannabis sector versus the overall market, and cannabis stocks become about as attractive as you’ll ever see. Especially in the U.S …
Buying today — before the majority of cannabis companies turn the corner to profitability and the masses are buying — is one of my favorite long-term strategies. By that time, investors will have realized the opportunity and pushed up the price.
***A pushback against an anti-marijuana argument
I just read an article predicting the demise of the marijuana industry based on one reason — price compression. Basically, the author argues that marijuana is a commodity. As such, the real “profit” in marijuana to date has been due to the fact it’s an illegal substance. But if/when marijuana is fully-legalized then, as a commodity, competition will drive its price down to such low levels that marijuana companies won’t be very profitable.
But if that was the case, wouldn’t we have seen similar profit-erosion from, say, tobacco? Or sugary products?
I believe the author of the article forgot a key point — when consumers fall in love with branded, habit-forming products, the long-term profits can be enormous … even if those products are based on a commodity.
But don’t take my word for it. Jeremey Siegel’s book, The Future for Investors, features a list of the 20 best-performing large U.S. stocks from 1957 through 2003 that kept their general corporate structure intact.
What was #1?
Cigarette maker, Philip Morris.
Look at the top 20 below and note how many of these companies sell habit-forming good based on a commodity.
Sure, if you invested in just “marijuana” you’ll likely see price compression in coming years — just as investing in a pure-play tobacco or sugar producer would be at the mercy of commodity pricing.
But the companies above have something different — a beloved brand.
Why should/will it be different for marijuana companies in the coming years?
From Matt:
… the biggest and potentially life-changing profits will come from brands. Producing a product that you can brand and distinguish as unique in the marketplace is a much, much better business.
Doing so allows you to build a loyal following, stand apart from the crowd, and raise your prices while maintaining your customer base …
It’s this magic of capitalism that allowed the makers of branded, habit-forming consume products to dominate Siegel’s list.
***As we wrap up, what are your thoughts on the marijuana space?
Do you see the long-term potential, or has the pullback led you to doubt the opportunity?
If you’re a doubter, remember — all fledgling industries go through exaggerated periods of growth and contraction. Why would we expect anything different from marijuana?
But what the article predicting the demise of the marijuana pointed out in a roundabout way — which Matt agrees with — is that investing in the top marijuana is how the multi-decade, big money will be made. These are the companies Matt is recommending to subscribers — these are the companies you should be focusing on.
But stepping back, it’s your decision as to how to interpret this pullback in the marijuana sector. It is a tremendous opportunity, or evidence of a burst bubble? Is it a chance to sign The Beatles …or The Tremeloes?
It’s your call to make, but here’s Matt’s final word:
This is a rare buying opportunity in stocks in an explosive industry that has been beaten down while the massive long-term growth remains on track … We are once again at a critical moment for investors bold enough to act. .
Have a good evening,
Jeff Remsburg
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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