I'm Adding A Pot Stock To My Portfolio

Discussion in 'Trading news and analysis (syndicated content)' started by StreetAuthority, Nov 6, 2018.

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  1. StreetAuthority

    StreetAuthority Active Member Official Contributor

    Buy the rumor, sell the news.

    Is this what happened with cannabis stocks after Canada legalized marijuana, only the second country in the world to do so? I think so. Some market participants have come to the realization that the valuation of pot stocks has gotten a bit out of control and used the news as a reason to unload positions -- some for a profit, some for a loss.

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    The long-awaited legislation, which, in practice, meant that the official start of legal recreational sales for adults in Canada was on October 17, was celebrated with a big selloff of pot stocks.

    The table below highlights the same three companies I profiled in my September 25 update issue, with an emphasis on their price post-Canada legalization price action. On average, the three stocks, Tilray (Nasdaq: TLRY), Canopy Growth (NYSE: CGC) and Aurora Cannabis (NYSE: ACB), declined 25% in just a week.


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    Can they decline more?

    It's possible. Fundamentally, these companies trade on a future promise and a potentially unlimited growth. Otherwise, their valuations don't make sense: Tilray, for instance, the largest of the three, commands a market capitalization of more than $11 billion while only selling about $40 million worth of product (and losing money in the process). Its expected growth, of course, is mind-blowing: next year its sales are likely to exceed $150 million -- that's 270% growth.

    Still, the company might not be able to continue to keep growing unless it gets its hands on more cash. This is why: to get its revenue growing, it is expected to have a negative annual free cash flow of $100 million and more -- all the while it has only $25 million in cash on hand. This is why TLRY will have to borrow, issue new equity or find an outside investor.

    My company of choice has already found a large outside investor -- and this is exactly why I like it.

    Fast-Track Millionaire readers already know that alcohol beverage giant Constellation Brands (NYSE: STZ), a subject of one of our "opportunity trades," invested as much as $4 billion in Canadian cannabis outfit Canopy Growth (NYSE: CGC).

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    Just like Tilray and many other marijuana stocks, CGC is growing like mad. In its fiscal 2018, a year that ended March 31, 2018, CGC delivered just under $78 million in revenue -- and in FY19, it's likely to quadruple its revenue, to about $360 million. It is still going to lose money -- for the full year of 2019, it's expected to post a per-share loss of about $0.40 -- but next year, its fiscal 2020, the company is expected to turn its first profit, of about $0.26 per share.

    If anything, it's likely to be sooner: with only about a third of its sales coming from Canada, and with a big partner like Constellation, there is room to grow and expand. But let's not get ahead of ourselves. CGC is different from the rest not in what it does, but in who it does business with.

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    While CGC's fundamental story is similar to many other marijuana stocks, it's the Constellation Brands investment that makes it safer. Most other companies will have to take the same route, issue new shares, or go bust. CGC has made the first step in what is likely to be the industry's MO. The fact that CGC has made this first step, having secured a $4 billion investment, speaks volumes about its management and its long-term view.

    And now, with the stock off by about 28% from its recent highs, is as good time as any to take a long position. That's why I made Canopy Growth (CGC) the latest addition to our Next Generation Dominators portfolio over at Fast-Track Millionaire. The cannabis stock space is uncharted territory, but I'm confident this pick has the right advantages to be another in a long line of winners my staff and I have identified over the years.

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    Street Authority
     
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