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We have arrived on the last day of the cannabis month. And what a month it was! This is an industry with tremendous potential mixed in with extreme emotions and volatility. I know the portfolio hasn't been moving upward yet, but looking at the stocks that Mark - The Green Fund's portfolio publisher - has picked up, I'm very confident we have got a basket of stocks that are worth paying attention to.
Today, to celebrate the end of our month-long deep-dive into the cannabis stocks, I'd like to share a long-form blog post to explain how we evaluated and picked the stocks that are included in The Green Fund portfolio. If you have a few moments to think through some fascinating ways of evaluating pot stocks, keep on reading.
Later today, May 29th @ 3:00 PM Pacific, Mark and I will host a virtual get-together to discuss this approach among other cannabis-related topics. Join us for that live event by reserving your seat.
How to deal with the overvaluation?
The cannabis stocks are some of the most overvalued companies you might have ever invested in. That's why you can see periods of extreme price fluctuations. For a few months, the stocks are running up. Doubling and tripling of the prices are not unheard of. Such glorious run-ups are most certainly followed by a period of a downward trend. Losing 10%, 20%, or even higher percentage of stock valuations is very likely in such times.
Therefore, the number one thing you need to be comfortable with is that you are investing in mathematically overvalued companies. You'd need to be emotionally ready to tolerate the ups and downs.
You'd also need to be logically comfortable with investing in overvalued stocks. How?
Think about it this way: Investing in overvalued companies is what most private market investors do, day in, day out. Large, institutional investors such as Fidelity or Softbank pour in money into overvalued startups every day (e.g., any recent tech IPOs that comes to your mind) When it comes to cannabis stocks, we are not talking about private market investing, but the nature of cannabis stocks is not too far from the private market and startup investing. Both are similarly overvalued! Period!
The advantage the private market investors have over us, the cannabis investors, is that they don't have the stock market reminding them of the value of the startups they are investing in. We, unfortunately, have to deal with the daily fluctuations of the stock market. The best of us understand that and move away from paying attention to the day-to-day volatility. Mark and I spoke about this in part 1 of our 2-part podcast episode.
Okay, I got that! But, how do I know which pot stocks to invest in?
Once we put the valuations aside, what's left is the operational strength of the companies we are evaluating. You certainly would want to avoid investing in operationally shaky companies that are also overvalued.
And, can you explain what do you mean by operational strength?
Companies with a high amount of debt, unproven management, lack of competitive advantage to protect their turf, or those who do not have cash readily available to fund their operations are the no-no choices in a basket of cannabis stocks. That's why, in the past five weeks, every time we spoke about a new investment pick for The Green Fund, we myopically focused on the operational strength of the companies.
That's why neither Mark nor I am worried about The Green Fund's under-performance so far. We are talking about startup-like investing here, and that comes with the territory. I have to say, I hate to see that the portfolio is not up, but I'm not worried, as explained above!
Knowing all that, where are the investment opportunities in the pot industry?
The next step is to see where in the see of cannabis-related stocks, we would need to focus on. Mark and I talked about it in part 2 of our podcast conversion.
Broadly speaking, there are two types of market opportunities in the cannabis industry: Pure-play cannabis and Adjacent markets.
Pure-play cannabis opportunity refers to the part of the cannabis industry that is purely focused on the cultivation, extraction, and retail and distribution of cannabis products for medicinal and recreational purposes. Some of the big names are Tilray or MedMen. While good investors try to focus on pure-play companies with strong operations, better investors also pay attention to the opportunities in the adjacent market. That's where the long-term gems reside. Companies that are working on developing pharmaceutical intellectual property or companies that are using cannabis as a new ingredient to bring a new category of products into the market are the most exciting investment opportunities in the cannabis sector.
Can you give me some examples?
Let's review and map two stocks that I personally have on my radar:
I hope this visualization and explanation help you create a reliable approach to evaluating cannabis stocks or other stocks that are in the mathematical overvalued price range.
As mentioned earlier, later today, May 29th @ 3:00 PM Pacific, Mark and I will host a virtual get-together to discuss this approach among other cannabis-related topics. Join us for that live event by reserving your seat.
To see the above framework in action, consider subscribing to Stock Card VIP, and access The Green Fund.
This week's "Master the basics of stock market investing" webinar was all about coffee. Starbucks (Ticker: SBUX) vs. Luckin Coffee (Ticker: LK), who wins the battle in your portfolio?
Watch the webinar's recording to figure out which one the battle on Friday! And, while you are at it, make sure to signup for the next upcoming webinar too!
Many people dream of such a promised land. You might have heard of the F.I.R.E. movement. The standard F.I.R.E. methodology typically assumes a person is saving as much as possible and living frugally (a bare-bones kind of frugality), then retiring extremely young. If you want to retire at 30, this is necessary... but... why not live your life a bit less frugally and still retire young, but maybe at 40 instead of 30? This is a very attainable goal for almost anyone, especially if you're able to start saving young.
As we are wrapping up The Green Fund month, we are also getting ready for the investment theme for June. And, June is all about getting F.I.R.E.D. Up!
The new portfolio coming to Stock Card's Portfolio Store is run by Eric Cuka, a successful sales executive and a long-time investor, who has been a member of our private Facebook Group forever. Eric has designed the F.I.R.E.D. Up! portfolio for people looking for a strategy to retire in their 40s comfortably.
Follow F.I.R.E.D. Up portfolio, and get into the groove of getting F.I.R.E.D. up!
My new favorite investing approach is beaten-down investing! You might have noticed that if you are following our Beaten Down portfolio. Every day, I look at the stock market universe and rank the companies based on how much they've lost. If it is double-digit price-fall, the day gets exciting...
Is the stock price down double-digit in the past month?
Is the company well-managed?
Why the price fell so much?
Can I see a reasonable path for the company to recover?
If the answer is yes, I'm very likely to jump in.
Lately, the pot stocks are showing up a lot in my daily beaten-down screening. Mark - The Green Fund's portfolio publisher - is in complete agreement with me. Beaten down investing is one of the best ways to pick up the stocks you have been watching for a while. He also wrote about why it's the best time to invest in pot stocks, despite the recent price falls. You can read Mark's post in this fascinating and informative blog post: "Duck Donald and Buy The Dip". We are also planning another live webinar to answer your pot stock investing questions on the last day of The Green Fund month. Reserve your seat and submit your questions for this free live webinar.
Without further ado, let's get to the main business. Today's Stock Card VIP pick is yet again a new addition to The Green Fund portfolio to tap your feet into the federally legalized side of the cannabis industry in the U.S.