What Cannabis is a disruptor agent towards pharmaceutical, alcohol, and sport recovery [products]."
Whether you are pro or against Cannabis and its legalization, what Bruce said in the quote above summarizes the opportunity and what many investors are excited for. It's not just the stock market that is excited about the potential. Things are no different in the world of start-up investing. No weeks go by without a few Cannabis startups showing up in the flow of the deals that come your way, if you are into startup investing. The excitement doesn't stop there. Consumer packaged goods and beverage companies are moving in. Constellation Brands, Coca-Cola, and Molson Beer are a few such companies that have already signed a deal and are pouring investments into the Cannabis market for an early entry into cannabis-infused consumables and products. When there is excitement, inevitably prices are pushed up, and irrational exuberance penetrate the air. Is there any real fire behind all the smoke and mirror?
On today's edition of Stock Card Weekly, we are looking at three cannabis companies at three drastically different price to sales ratio (whoa?) to see which one is worthy of a spot on our watchlist and ultimately finds its way into our long-term portfolios. Today's contestants are: Aurora Cannabis Inc, Canopy Growth Corporation, Tilray Inc.
Note: All numbers stated are based on the last available data on 9/29/2018. If you are reading this edition at a later date, the information might be drastically different. Be smart and check your numbers.
Before we move on, did you say "woah" when you read we are using price to sales ratio to compare today's contestants for the watchlist-worthy battle of marijuana stocks? If you don't know why and what that means, maybe you should consider joining the How To Invest University ;)! Anyways, most commonly, we use price of a stock per each dollar of its earnings to see how high or low a stock is priced. It is referred to as Price to Earnings (PE) ratio. Today, because most Cannabis companies have no earnings or unreliable earnings, we opt to use Price to Sales ratio which indicates the price of a stock per each dollar of sales it makes. It's still a credible way of evaluating how expensive a stock is. Alright, let's move on!
$ Aurora Cannabis Inc (Price to Sales ratio: 104.17)
Aurora Cannabis (ACBFF) is the marijuana partner to Coca Cola (KO).The deal was closed just recently, and it is perceived as a stamp of approval for the company's strength as a market leader. Additionally, Aurora Cannabis seeks to be 'Amazon' of marijuana. In May of 2018, the company announced its plan to acquire MedReleaf. This gives Aurora Cannabis access to four additional geographical markets. As per its Founder and CEO Terry Booth, Aurora Cannabis has plans for further expansion through acquisitions. Despite all the excitement and being the cheapest-priced company in today's battle, the company spends $0.10 billion to generate $0.04 billion in revenue and $-0.17 billion in free cash flow. The challenges in front of the investors in this company and the majority of companies in this sector are dilutive convertible notes, negative cash flow and uncertainty related to legalization of marijuana in the U.S. and globally.
Visit Aurora Cannabis' Stock Card
$$ Canopy Growth Corporation (Price to Sales ratio: 142.56)
Canopy Growth Corporation is one of the largest producers of medical cannabis with operations across 11 countries around the world. It is also the first company that was able to conceive major non-marijuana player to take a chance on the growth opportunity in the market. Constellation Brands is a partner and investor in the company and together the duo have their eyes on the cannabis-infused beverage market. Despite the signs of strength, the company spends $0.09 billion to generate $0.06 billion in revenue and $-0.20 billion in free cash flow. Canopy Growth reported annual and Q4 earnings in June 2018. Its annual revenues increased by 95% year on year. The company is growing at a fast rate, with expansion in Africa, Europe and Australia. It recorded excellent Q4 revenues in Germany. The company recently launched Spectrum Softgels which boosted its sales. A range of patented cannabis-based medicines by Canopy Health Innovations recently received approval to conduct its first trial, in a planned series of clinical trials. This is a big step forward for the company. No wonder the stock is priced higher than Aurora Cannabis. Canopy Growth has its eye on the most diverse possibilities of growth, both across different product categories and across several geographical market.
Visit Canopy Growth' Stock Card
$$$ Tilray Inc. (Price to Sales ratio: 584.43)
Among the three contestants, Tilray is the least known. It recently got hiked to the peak of media attention, because the stock grew by 10X in the course of just one year, post its IPO in 2017, without any major growth in sales. As you can see, at 584.83X of its sales, this is one of the most expensive stocks you may ever encounter. While the opportunity to grow is large, most of the company's stock price gain is financially driven, not operationally. In other words, there has been insignificant business win, rather an announcement that a few hospitals in Australia are using the company's products. While the news is big in nature and indicates the possibility of pharmaceutical companies entering the market, there are no sales numbers to show the scale of the opportunity. Before the latest announcement, only 29 patients were using the company's products. And, the latest announcement does not offer any clarity into the scale of the agreement with the Australian hospital. Fueled by the news, and with very small number of shares available to be traded by the investors in the public market, the stock changed hands fast and furious (no pun intended). And, we ended up seeing double-digit price movement upward and downward in the course of the past few days.
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Who is our watchlist-worthy pick?
It's a hard one, because all three companies are extremely expensive. One of them is easy to eliminate though. Despite the potential growth opportunity that may come with Tilray if it signs a large-scale agreement with a medical or pharmaceutical company, at this point of the hype cycle, there is no solid evidence to justify investing in the company. No major improvement in the sales, combined with high-volume trading reminds us of another craze. Bitcoin at $20K, any one? With that, the battle is between Aurora and Canopy Growth. Canopy Growth is an interesting company. The growth of the company has not been reliant on the legalization of recreational marijuana. The company has made it clear that it only operates in the markets where legalization across all layers of government is in place. Additionally, a few strategic partnerships in the past few months has increased my confidence in this stock. The partnership with Constellation Brands for production of marijuana-infused beverages and distribution deals in Australia and Germany are a few key examples. Even without recreational marijuana legalization, the company is poised for growth within a growing market. On the other hand, Aurora has one of the lowest production cost per gram across its key competitors and the investments made in its upcoming Sky facility is expected to give Aurora Cannabis a much larger production capacity. Among the most significant players in the Canadian market, Aurora is the one that has built a stable distribution process to serve the Canadian market after the legalization. The potential agreement with Coca-Cola to produce a new wellness beverage is also an opportunity for opening up new revenue sources. [Hoda: I edited this sentence after the blog was posted, thanks to Scott T. - a member of our Intelligent Investors FB group - who rightfully reminded us that the agreement is not signed yet. That's called the power of having a community of smart investors around you. Thank you Scott!] Combine that with the lowest price to sales ratio, at this point, I'm adding Aurora Cannabis to my watchlist to monitor for a while and potentially pick up some shares in the upcoming months or quarters.
That's it for this edition of Stock Card Battles, the Cannabis edition. If you are a premium member, you can log in to see whether any of these companies exist in our premium portfolios. Make sure to write back to me, or share your thoughts and ideas with your fellow intelligent investors on our FB group, Twitter or anywhere else to access your Stock Card Weeklies.
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I have had 100s if not 1000s of conversations with Stock Card users. We always have honest conversations about what they think about the stock market. They share what they are excited about and what intimidates them. While every conversation has its own focus, there are a few well-accepted misunderstandings about the stock market that are the underlying themes of almost all such conversations. These misunderstandings are so wide-spread that many people use them as the reasons to avoid investing in the stock market. In this blog post, we are looking at the top seven misunderstandings about the stock market. All successful investors have found a way to overcome such misunderstandings. Have you?
Number 7: Stock Market is rigged against me
Number one misunderstanding about the Stock Market is that the system is rigged against us. I hear this too many times. Especially form the younger people. You know the avocado toast generation ;) I sometimes feel that way too. When you hear about the financial crisis, or Bernie Madoff scamming investors and stealing their money, or you learn about the scams that Wells Fargo pulled off, it's easy to just assume that if you invest in the stock market, there is an evil corporation sitting to rip you off on the other side of the line. But in reality, those are just small portions of the market. The stock market is a marketplace similar to every other one. Just like AirBnb is a marketplace for people's extra bedroom, the Stock Market is a marketplace for the company's shares and other financial products. These markets are not good or bad. How you use them as a user can be good or bad. But, marketplaces are just markets. They are not rigged or do not play favoritism. Especially when it comes to stock market, years of government regulations and scrutiny of the public has forced them to eliminate any bad player or behaviour.
Number 6: Trading is the same as investing
You probably hear your friends talking about how they lost 10,000 dollars in the stock market when they were 22, and they had to move back in with their parents and other such stories. While those stories are true, those are mostly related to people who wanted to trade and not invest. To explain it in the simplest terms, when you trade, you are all about charts and stock prices. And, you try to use whatever you can to predict the future price. Maybe in the next 2 minutes or 30 days. That's just extremely fast-speed, too technical and one might even say delusional. But, there is another way of participating in the market. It's called investing. You don't really care about the prices. You rather focus on the strength of the companies you are investing in. Do you know how venture capitalists invest? They are not investing because the valuation of the company is going to go up in the next 2 hours. They pick a good team, a good product, a company with indicators of success and let the company grow for years before they consider selling. You can participate in the stock market just like you invest in a startup, or in real-estate or your friends' restaurant. You never invest to sell in the next 30 minutes. You are investing because you believe in the company and its long-term potential.
Number 5: Investing is the same as gambling
This one annoys me so much! Because people think investing in the stock market is like playing on the slot machines. You put your money in, and either "ding ding ding" you have dollar bills flying over you, or you lose all of your money, so keep betting. Again, if you are trying to predict the price of a stock in the next 30 min or 30 days, it's sorta similar. But, if you are investing, you are doing it based on facts, information, and you invest slowly. Sure, there are times when the whole stock market goes down. They say, 1 out of 3 years, the stock market falls. But, never does the stock market lose all of its value in one day. According to CNN Money, on "Black Monday" in 1987, the Dow plunged 22.6%, still the biggest one-day percentage drop in history. Even on Black Monday the one-day price-fall was not as much as what most people assume.
Number 4: You need to be a math wiz or have a PhD to invest in the stock market
There is a misunderstanding between what you need to know if you want to invest and what you need to know in order to work in the financial industry. The easiest way to think about it is like buying a house. Buying a house is an investment. But, you don't go and become an architect or an engineer to buy a house. You use your judgment and you do research and collect information and make an informed decision without having a degree in architecture. The same goes for investing. You don't need to have a degree in finance to be a good investor. Finance degrees are required if you want to build a financial product or work in banks and stock exchanges. But, investing needs common understanding of how the world works, and how the companies make money. You can learn the basics of how you measure the revenues or profits of a company. There are probably 10 financial things you need to know and that's it. After that, the rest is filled with just too much technicality you do not need to be a long-term investor. Also, these days, you can google everything. You don't understand a financial term, just google it. On websites such as Investopedia, or investor.gov, everything you need need to learn is already explained in an easy way.
Number 3: You need to keep up with the news at all time to win in the stock market
This one is a hard one to skip. It's because financial media is just everywhere. Even the non financial media talk about what the companies do. But, you need to remember that the news is not really designed to inform us, but to entertain us. It creates overly positive or too negative halo of what's happening. For example, if a company releases its quarterly earnings, and everything is going well, except that the growth of users is a bit lower than what the analysts expected, the headlines will be "Company X missed the analysts' expectations". It's good for the media, because people show an emotional reaction to such news, rather than to a news that says, everything for company X has been good and nothing really to pay attention to. Maybe for the next few quarters monitor the user growth. Well, no one would click on that topic. So, naturally the headlines are designed to make us show an emotional reaction. There is a very interesting article shared on one of our intelligent investors FB group threads. It is about how CNN reports political news like sports. Which is also true about how financial media reports facts like a drama and celebrity news. You see arguments between the commentators, you see countdowns, and visual clues to make you react emotionally. Clicks fuel the media. So, if you really understand the incentives behind the financial media, you really should step back, shut down those news notifications and not make investment decisions based on those.
Number 2: Someone, somewhere can predict the stock market
With all the advancement in the technology and the talks of artificial intelligence and algorithms, it's easy to believe there is a tool named crystal ball somewhere that can predict the market. But, the reality is such a thing doesn't exist. Look, there are two kinds of systems. This is from George Soros, who is a pretty well-known trader and who has gotten wealthy placing large bets on the world's political speculations. He, by the way, has lost a lot of money too. But, net-net he made more that he lost. Anyways, he says there are systems where the predictions impact the results and those are almost unpredictable. What he means is that, when you predict where the stock price would go, and you act on it, you knowing that and acting on it impacts the direction of the market. So, there is no hidden villain somewhere who knows how the market moves every second, and he or she is making perfect money. The other thing to remember is that all these market prediction algorithms need data to be able to predict the market. The stock market is being impacted by millions of players. We simply don't have the inputs required for the algorithm to work 100% of the times. Maybe sometime later in the future, a new wave of technology comes around that can read the internet and understand every piece of text and document and comments and conversations that is being put out there, and has enough historical data of each element to understand the impact it has on the company's price. Until then, and as far as it concerns us, there is no way to predict the stock price. Someone you know might have gotten lucky 5 times, but sooner or later he/she will flop. Don't believe anyone's claim until you see a reliable stream of results.
Number 1: Individual people should not invest in individual companies
Oh yeah, the mother of all misunderstandings, the source of all confusions! No individual people should invest in individual companies and the best you can do is to invest in an index fund and earn the average of the market. I actually have a story about this. You wanna hear it? I remember I was telling a friend of mine who was and still is a VP of a technology company I was working with. He's a smart guy, with a consulting background, makes investment decisions for the company by allocating money to projects and ideas, etc. But, when I told him that I'm leaving the company to start my own start-up, Stock Card, he replied, well there is a school of thought that says, individual people should not invest in individual companies. There are so many people, so many smart, well-educated people who wholeheartedly believe that they should not invest in individual companies. You see the same smart people make money decisions for their companies, they invest in startups and other projects, but when it comes to the stock market, it is engraved in their brains that they should not touch it.
In reality, look at successful investors, most of them make their own investment decisions. Sure, you have to learn some basics, and learn not to be emotional about investing. But, you can say that about everything. Since, you may overeat and not go to gym for a few weeks, you should never try to be fit. You may get a bad score in an exam, or just not be good at one subject, so you should stop going to school. It just doesn't make sense. Maybe 10 years ago, 20 years ago, everyday people didn't have access to the wealth of free information we have at hand now. Maybe it was hard to aggregate them, maybe it was expensive to order them. But, now, with all the technology we have at hand, using internet and all the tools, we can subscribe for small amount of money, there is no excuse. There is no excuse to say, individual people should not aspire and dare to be great at investing in individual companies.
That's it! Do you have any of such misunderstandings? Let me us know, either send me a note through any of the following channels and let's have a conversation about it. The sooner you resolve such misunderstandings, the sooner you'll become an intelligent investors. Let's do it!
Let's wrap up with a few newly published Stock Cards. Have you seen them? Stock market investment inspirations are all around us. You just have to look up their Stock Cards:
A shrinking map by the minutes, 100 or so soldiers mostly hiding but some fighting, and there shall only be one winner. That's called a Battle Royale mode and it is the latest video game craze. Remember, Candy Crush and PokemonGo? This is another one of those! The Fortnite game is the reason behind the battle royale craze of 2018. The game is developed by Epic Games. By some estimates, fueled by the success of Fortnite, Epic Games is now valued somewhere between $7 to $14 Billion. So far, it's just a craze, and nothing interesting for us, the stock market investors. Epic Games is a private company. But wait a minute! Tencent Holdings - the Chinese video game giant - owns 40% of the company. Clap your hands, 'cause things are getting interesting!
On today's edition of Stock Card Weekly, we are looking at three video game companies that are releasing a Battle Royale mode to see which one is worthy of a spot in our watchlist and ultimately finds its way into our long-term portfolios. Today's contestants are Tencent Holdings, Electronic Arts, and Activision Blizzard.
Note: All numbers stated are based on the last available data on 9/14/2018. If you are reading this edition at a later date, the information might be drastically different. Be smart and check your numbers.
$ Tencent Holdings (Price to Earnings ratio: 32.93)
Tencent Holdings is the gaming giant of China and world's biggest video game company, which also owns 40% stake in Epic Games, the developer of Fortnite. The company is a direct beneficiary of the Fortnite success. However, things are not going very well recently for Tencent. Seems like they have had some issues to sort out with game approval process that has caused the company to declare the first-ever quarter with a decline in their profit. This is of course a risk that comes with investing in the Chinese companies. We need to consider the risks that come with the impact of regulations and government ownership on the stock price fluctuations. Having said all that, Tencent is definitely a not-to-be-missed opportunity for risk-takers. It owns several successful game studios such as Riot Games and PUBG. Riot Games is one of the largest eSports game franchises in the world of "League of Legends". Tencent also is the publisher of PUBG (PlayerUnknown's Battlegrounds) which is the first game that created the Battle Royale craze. Among many other businesses, Tencent owns an instant messenger service called Tencent QQ and one of the largest web portals, QQ.com. It offers WeChat which is one of the world's most powerful apps. It also owns the majority of China's music services (through Tencent Music Entertainment), with more than 700 million active users and 120 million paying subscribers according to Wikipedia. At 32.93 price to earnings ratio, Tencent Holdings is a cheap bargain that comes with the a baggage of regulatory risk. In the Battle Royale of gaming stocks, it's hard to ignore this giant.
Visit Tencent Holdings' Stock Card.
$$ Electronic Arts (Price to Earnings ratio: 51.28)
Electronic Arts recently announced that it is delaying the release of its blockbuster video games title - Battlefield V - by four weeks. The delay is partially because the company plans to introduce the Battle Royale mode. Battlefield is one of the most popular first person shooter IPs that will include a Battle Royale mode as well. That makes this delay note-worthy. As muchs as the news is interesting for the player, the delay means there will be four fewer weeks in the current fiscal year to sell the game and that has got the analysts worried. For example, analysts at Merrill Lynch decided to reduce their estimated price target for EA for the next 12-18 months. While the concerns are valid, for long-term investors a few weeks of sales is a blip in the lifetime of a market leader such as EA. If you read through the managements' note, the delay in the release of the game is actually a strategic move. They postponed the game because of two reasons: 1) They have been receiving a lot of feedback from the gaming community about the recent monetization scheme which was introduced in a few of their games earlier this year. Such feedback is extremely valuable, and it is ingenious of the management to take the input and make sure they refine and polish their new game releases according to the feedback. 2) The change in the timing is expected to reduce the competitive pressure and put a time-gap between the release of the Battlefield game and other competitors such as Red Dead Redemption 2 by Take-Two Interactive and Call of Duty Black Ops 4 by Activision Blizzard which are also scheduled to be released around the original release date. As you can see on the EA's Stock Card, not only is the dip meaningful dragging the stock price to an undervalued range, but also the reasons behind the dip which are strategic, and we have the information to believe that there is no real change in the operational strength of the company.
Visit Electronic Arts' Stock Card.
$$$ Activision Blizzard (Price to Earnings ratio: 125.63)
While Fortnite was the talk of the town, Activision Blizzard was hard at work at their own battle Royale Game. What do you get when you smash the world's most famous first-person shooter IP, with the most crazed video game mode? You get Call of Duty, Battle Royale mode! (Duh!) Since the company released its open beta, the stock has been up close to 10%. The critics are raving about it and the video streamers are sharing their excitement all over. Many of the loyal Call of Duty fans, who were not sure whether they are going to buy the new release of the game scheduled for later in the year, now are counting down to the day they can get to download the full game and get to the battle. Beyond the Battle Royale mode, much like its rival Electronic Arts, the company is on track to benefit from the emergence of the eSports category and has already invested significantly in developing its eSport line of business. The investment includes the development of an eSport league, athlete drafting and recruitment rules and the development of the world's first eSport stadium for its popular Overwatch franchise. Activision Blizzard is a monster player in the video game industry.
Visit Activision Blizzard's Stock Card.
Who is our watchlist-worthy pick?
Which of these battle royale stocks is worthy of a spot in our intelligent investing watchlists? All three are well-managed companies in a strong market. It's hard to choose, to be honest. But, if watchlist is a place where we put the companies that are worth our attention and we wish to monitor for a while before jumping in, I have to say Tencent is my watchlist-worthy winner. Especially, at such a cheap price to earnings ratio, the company is worth considering. The other two are already strong companies and they already belong to most of the long-term portfolios out there. And, since we are focusing on Battle Royale mode, Tencent is clearly the note-worthy one. Not only do they own 40% of Epic Games - Fortnite, but also publish PUBG game, which is the first Battle Royale game created before Fortnite's success. The opportunity is just so big for the company in China to make money off of this new craze in the video game industry that it is undoubtedly the winner of today's Stock Card battle.
Hope you enjoyed this episode. If you are a premium member, log in to read about Stock Card team's final decision. If not, write back to me or share your thoughts on our Facebook Group and let your fellow investors know which one is your watchlist-worthy winner.
You or someone you know has the dibs!
What a week! Politics got mixed with investing, and Nike's stock dipped. Tesla's CEO smoked some weed while having an honest conversation, and the stock dipped. JD.com's CEO got arrested for God-knows-doing-what, and the stock dipped. So, for this week's edition of watchlist-worthy battles, we decided to look at these three dipping stocks to see which one is worthy of a spot in our watchlist and ultimately finding its way into our long-term portfolios. As always, if you are a premium member, log-in to find out our final investment decision for each stock. Let's get to the battle:
Note: All numbers stated are based on the last available data on 9/8/2018. If you are reading this edition at a later date, the information might be drastically different. Be smart and check your numbers.
$ Nike (Price to Earnings ratio: 69.7)
Whatever your political views are, there is no denying that the move by Nike turned one of the most controversial political topics of the year into an amazing PR campaign. Sure the stock dipped around 3%, but emotion is what Nike's brand is built upon. I read an article that stated "Dan Wieden, co-founder of W+K, Nike’s Ad Agency and the originator of the Just Do It slogan once said, “to be on the cutting edge means someone or something needs to be cut”. He wasn't afraid to take controversial chances and he loved working on Nike’s business because this was part of Nike’s brand DNA from the start." Beyond the Just Do It campaign, the company spends $11.51 billion to generate $36.40 billion in revenue and $3.93 billion in free cash flow. And for a company of the size of Nike, the revenue continues to grow steadily. Dip or no dip, this is a stable company, that pays dividend, with deep emotional connection with its consumers. No wonder the price to earnings ratio of the stock is more than double the average of the market.
Visit Nike's Stock Card.
$$ JD.com (Price to Earnings ratio: 318.9)
Yikes! C'mon man! Can you not just leave your celebrity life and run your company? That was my reaction when I read the news about the founder and CEO of JD.com getting arrested in the U.S. based on very serious sexual misconduct allegations. The man is a celebrity and billionaire in China nad married to a celebrity. But, no! He had to jump off the cliff of morality! Allegedly. We really don't know the full story here. But, the stock took a pretty big, double-digit hit following the news. While the police investigation continues, the investors in the company are left with a dilemma. On one hand, the company is a prime candidate for a market disruptor. It continues to capture market share away from Alibaba. Through its partnership with Tencent, investment by Alphabet, and several new partners, the company has a shot at an extraordinary growth rate. JD.com is a well-managed company too. It spends $8.28 billion to generate $58.54 billion in revenue and $2.44 billion in free cash flow. That's why the investors have rewarded the company with such a high stock price which has pushed the price to earnings to 318.9 as of the date of the publication of this analysis. On the other hand, if the allegations are true, there will be a big shake up in the management. Not to forget that most long-term investors do not want to hold on to the stocks of the companies that they do not ethically feel comfortable owning. It's a dilemma, and the dip is tempting!
Visit JD.com's Stock Card.
$$$ Tesla (Price to Earnings ratio: No earnings, which means at any price the stock is way too expensive.)
Oh Tesla! Tesla, Tesla! Expensive but disruptive, a great brand, with a side of weekly drama! And, a financial media that uses Tesla's name and mentions Elon Musk to come up with a new clickbait everyday. This week again, we witnessed a drama. While Elon Musk was having a very honest and candid conversation with Joe Rogan, the host offered him a joint. He tried and gave it back saying it's not for him. But, then the media went frenzy, people talk about him losing his security clearance because he used a drug, and the stock was ready to take on another hit. The stock price was around $260 when the market closed on Friday. And, since the company has no earnings, using price to earnings ratio means the company is among the most expensive stocks you can pick up. The company spends $3.98 billion to generate $12.47 billion in revenue and $-4.43 billion in free cash flow. And, the concerns about the company's ability to stay afloat and not run out of cash continues to be valid. The case for owning Tesla stocks is not supported by intelligent investing facts, but rather dependant on the faith investors have in Elon Musk and the future they imagine in their own minds.
Visit Tesla's Stock Card.
Who is our watchlist-worthy pick?
Eliminating one of the three is easy. Investing in Tesla has nothing to do with the numbers and facts. Even if the stock dips further, investing in the company is only wise if you are willing to lose all of your money for a narrow chance of being a part of the future of energy and cars. Or, if you just like supporting Elon. Choosing between JD.com and Nike is not that difficult either. JD.com is a very well-managed company, the dip in the stock is significant and the cause of the dip is not operational. Mind you, if the allegations turn out to be true, there will be a period of further price decline, but in the end in a growing market like China, and with all the stakeholders involved the company will most likely do well in the long-run. As an investor you need to decide to what extend it matters to you to support a company led by a man with no moral compass. In the end, the winner of the watchlist-worthy battle is Nike. I don't believe the dip in the stock is meaningful. The dip is not significant enough to drag the stock to an undervalued range. But, among the three dipping stocks of the week, Nike is the only one that has everything it needs to continue to win. I'm not saying you should jump in and invest in NIke, but visit the company's Stock Card and see for yourself whether the stock fits your investment strategy.
Hope you enjoyed this episode. If you are a premium member, log in to read about Stock Card team's final decision. If not, write back to me or share your thoughts on our Facebook Group and let your fellow investors know which one is your watchlist-worthy winner?
You or someone you know has the dibs!
Stock market battles continue here at Stock Card HQ. On today's edition of Stock Card Weekly, we are looking at three restaurant stocks at three drastically different share price points to see which one is worthy of a spot in our watchlist and ultimately will find its way into our long-term portfolios. This is the third edition of the watchlist-worthy battles.
Last two weeks, we looked at three car companies - Volkswagen, Geely, and Ferrari and three retail companies - Target, Walmart, and Stitch Fix and chose the one that we believe has the most potential to generate wealth for its investors. If you haven't read either of the previous editions, you can find them on this blog. Just scroll down a bit further.
Let's get to know today's contestants:
Note: All numbers stated are based on the last available data on 9/01/2018. If you are reading this edition at a later date, the information might be drastically different. Be smart and check your numbers.
$ McDonald's (Price to Earnings ratio: 23.7)
Recently I watched the movie 'The Founder' which is about the founder of McDonald's Corp, Ray Kroc. While he is not the actual founder of the company, what made a lasting impression on me was Ray's vision to build McDonald's as the new American church that is open 7 days a week. Every town across the country used to have a city hall with a flag, and a church. Ray wanted them to all have a McDonald's with its golden arches. And, he has delivered on the vision. Today, the restaurant chain is one of the best real estate business companies in the world, which by way of owning its real estate locations, maintains its dominance. Fast forward to the current day, the company is still worth owning, especially after the new CEO, Steve Easterbrook took over. Starting with introducing the all-day breakfast menu to revamping the McCafe experience, the company is staying relevant to the changing tastes of the customers. The picture is not all perfect though. The company still has to compete with several other restaurant chains for customers. In the recent quarterly earnings, we learned that growing the traffic to the stores remain a challenge. At 23.7 price to earnings ratio, McDonald's stock is not an expensive stock to own but not a cheap one either.
$$ Chipotle Mexican Grill (Price to Earnings ratio: 78.8)
You may not remember the food contamination incidents the restaurant chain had in 2016, but the company's stock is not yet back to its all-time high glory days. Everyone's favorite Burrito stock fell off the cliff, and it hasn't been able to recover from the fall. However, the signs of recovery are emerging. Sales growth is positive, earnings per share are positive, and the company has no long-term debt. There is also a new CEO. He comes from Taco Bell, and he knows how to recover a company back to its glory days after food contamination incidents. Afterall Taco bell has been through a similar path and has come out triumphant. CEO Brian Niccol is working on several initiatives to turn the company around. Mobile-delivery through the Chipotle app, building the company's loyalty program and testing new food items such as quesadillas and milkshakes are among such initiatives. At 78.8 price to earnings ratio, Chipotle is not a cheap stock to own, but good thing may come to those who are patient.
$$$ Shake Shack (Price to Earnings ratio: 604.4)
The first time I looked at Shake Shack's stock price I couldn't believe my eyes. You know how they say Netflix and Amazon are very expensive stocks. But, Shake Shack leaves those stocks in the dust. At 604.4, Shake Shack maybe one the most expensive stocks you may come across. Shake Shack is a relatively new burger business. The company is growing strong, with revenues increasing by 29% year over year. However, the company hasn't been profitable consistently, and the same-store sales are not growing. Shake Shack has plans to expand in the U.S. as well as globally, by increasing the number of restaurants from 162 to 450 by the year 2020. Such an expansion plan is what is driving the stock price into an overvalued range. In a way, the stock market investors are looking to find another darling to replace the empty spot Chipotle has left in their portfolios. For a restaurant chain that has to compete heavily with many other restaurants, the lack of profitability and growing sales in its current restaurant locations are serious risk factors a long-term investor cannot ignore.
Which is our watchlist-worthy pick?
Which of these fast-food stocks is as irresistible as its food? Eliminating one of the three is easy. While I have never tried Shake Shack's burger, at 604.4 price to earnings ratio, it is just too expensive to consider. The stock may even go higher in price, but it is somewhat entering "cryptocurrency" territory. The value is not correlated to the cash-generation power of the company, but instead, it is reflective of the popularity. For me, that gets into speculation territory and out of investing. Between McDonald's and Chipotle, things get a bit more down to earth. Fundamentally, these two are very different businesses. One is a global real-estate conglomerate that happens to sell burgers and fries that is loved by billions. The other one is a fast-growing burrito concept that has hit a few roadblocks. As much as I love McDonald's, I think Chipotle is the one that is worthy of being added to the watchlist. The new CEO is doing very well, and the company is still profitable. All they need is a few quarters of execution as per their plans, and the company can grow in the U.S. and then expand globally.
Hope you enjoyed this edition of Stock Card Weekly. If you are a premium member, log in to read about Stock Card team's final decision. For the rest of our community, hope you enjoyed this edition. Write back to me, or share your thoughts on our Facebook Group and let your fellow investors know which one is your watchlist-worthy winner.