A daily stock analysis based on stock market today
  • Daily Roll
  • YouTube
  • Podcast
  • Investor Hubs
    • Starter Investors Hub
    • Dividend Seekers Hub
    • The Risk Hub
    • COVID-19 Investing Hub
  • Sign Up

How to evaluate and pick a cannabis stock?

5/29/2019

 
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.
Picture
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:
  • ACB: Profitable + No Long-term Debt | Large scale, global presence in cultivation and distribution
  • CVSI: Profitable + Free Cash Flow | Drug development utilizing CBD
The diagram below should explain it better:
Picture
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.

Visit The Green Fund

Comments are closed.

    RSS Feed


    Archives

    December 2022
    September 2022
    July 2022
    February 2022
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    February 2021
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    January 2020
    October 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017

    Categories

    All
    Battle
    Education
    ETF Investing
    How To Invest
    New Podcast Episode
    New Portfolio
    Portfolio Update
    Starter 2020
    Stock Card VIP Pick
    Stock Lists
    The Daily Hype
    Update
    Watchlist Worthy
    Winners And Losers

© 2017 StockCard.io. All Rights Reserved.
​​
Disclaimer: StockCard.io is not, neither operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on StockCard.io and Stock Card Weekly represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The Stock Card team may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall StockCard.io be liable to any subscriber, visitor, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on StockCard.io, or relating to the use of, or inability to use, StockCard.io or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way.
  • Daily Roll
  • YouTube
  • Podcast
  • Investor Hubs
    • Starter Investors Hub
    • Dividend Seekers Hub
    • The Risk Hub
    • COVID-19 Investing Hub
  • Sign Up