The Trade Map Shifts but the World Keeps Turning

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

The last time I was on Bloomberg TV, the interviewer kept asking me whether the trade war was actively destroying global industry. I couldn’t disagree more.

As barriers rise across some international borders, goods and services find other routes to reach their ultimate destinations. All the stuff modern economies rely on will keep flowing.

After all, people around the world need to eat. Oil keeps moving from wells to refining plants and ultimately to consumers. Manufacturing plants will keep closing when it gets too expensive to serve their natural outlets, while new ones open in places with lower end-to-end drag along the way.

China still needs to eat. If anything, China needs to import more food to replace crops and livestock ravaged by pests and disease. In turn, Americans and American companies still need products from overseas, as well.

If historical sources close, we’ll create new supply chains elsewhere. Once upon a time, Thailand was a key producer of computer components, for example.

But before I dig into this discussion, I want to show you the video to provide an executive summary of what I’m talking about. Watch the video by clicking here.

I truly believe that the Wall Street shudders we’ve seen lately are not about China at all. They aren’t even about Mexico.

Trade has been an overhang on corporate outlooks since the October market downswing and most companies exposed to truly crippling tariffs either have shifted suppliers or simply will pass on higher import fees to their customers.

Some will do both. Look at what Dollar Tree Inc. (NASDAQ:DLTR) is doing. The company has shifted its seasonal merchandise supply contracts away from China and now is experimenting with raising its average price point beyond the symbolic $1.

Whatever these companies do, they aren’t simply sitting passively watching the headlines and waiting for the world to end.

They’re anticipating developments, planning for the worst while remaining open to the very real prospect that we’ll see a trade truce, if not a complete breakthrough soon. China wants a deal. We want a deal.

We easily could get a deal by the G20 summit in Osaka at the end of this month. In the meantime, the Fed now looks poised to provide any necessary rate relief to keep the domestic economy humming.

That’s important in this context. Cheap money supports consumer spending. Consumer demand drives corporate strategy. If we want it, companies find a way to give it to us.

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What am I looking at? The Chinese periphery nations have been overlooked for years by many businesses but are gaining interest again. These are countries like Malaysia, Taiwan, Thailand and Singapore.

As money flows to these countries, products and profits will flow out. This is rapidly becoming an exciting time to be an emerging markets investor. Japan becomes interesting. Korea becomes interesting.

And most known risk factors are already priced in. As I’ve been saying, Apple Inc. (NASDAQ:AAPL) derives about 20% of its revenue from China.

That stock was down 20% a few days ago. Chinese demand for iPhones may decline, but it’s not going to drop below zero. Anything better than zero indicates that Apple is oversold and undervalued.

Or if you think total trade war is coming, look at companies that are already banned in China. Why is Twitter Inc. (NYSE:TWTR) 20% below its high? Don’t blame the trade war.

Even an incremental trade thaw is more likely than a complete meltdown at this point. And that makes me suspect a rally is around the corner.

CANNABIS CASH CORNER

Update your expectations. We no longer live in 2012 and the cannabis industry has had the better part of a decade to step out of the regulatory shadows.

Investors no longer need to relax their standards to get exposure to the theme. People who push you to ultra-speculative and ultra-obscure micro-cap stocks that don’t trade on any legitimate exchange are behind the curve.

There are alternatives now. My proprietary Cannabis Sector Screen has expanded to include hundreds of publicly traded companies with a material stake in the long-delayed commercialization of this plant and its derivatives.

Granted, a lot of them are still sub-penny wonders with delinquent financial filings and nebulous business plans. But enough companies with real revenue and paths to profitability have emerged that serious investors can now take the theme seriously.

After all, there’s serious money here now. The legal cannabis map is a lot greener than it was when one percent of the population had access to prescription weed and Seattle and Denver were in the early stages of lighting up.

Canadian legalization changed the game. Last year’s Farm Bill removed industrial barriers on non-mood-altering hemp. A full 29 percent of the North American population now can use the cannabis recreationally.

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Even so, navigating the new landscape can get confusing, especially when so many people keep pushing the sub-penny wonders. That’s why I’ve spent a lot of time building new analytic tools to evaluate those hundreds of cannabis stocks on my screen.

And it’s why I’ve been visiting cannabis cultivations around the world to draw a line between what’s real and what’s just smoke. There’s a lot of smoke out there getting in the way of making real money.

One of the tools I’ve developed is a way to rank any cannabis company’s unique upside profile relative to its volatility. Too often, people look at these stocks as a boom-or-bust proposition that will either make everyone rich or burn out along the way.

That’s just not the way the world really works. Lucid investing is all about shades of probability, extending historical trends as far as you dare into the future before the market is saturated or external factors get in the way.

For cannabis, the market isn’t saturated yet, but there’s a wall just over the horizon. Remember, 29 percent of the population is already free to buy as much recreational cannabis as they choose.

That means demand in states like Colorado and Washington already have reached equilibrium. In the foreseeable future, that will even be true in places like California.

While there’s still a lot of room for organic growth, the map itself only can support triple the current market opportunity before every state turns as green as it gets. (And if some states opt out, the limit comes a little faster.)

Some companies will be able to grab enough of that vast but limited market to make money and reward shareholders. Others will run out of time before reaching that finish line.

We’ve seen it over and over in every “gold rush” scenario when a new industry beckons an avalanche of hopefuls and the venture capital that turns on the lights. When it’s all over, a wave of consolidation establishes the winners, taking the losers off the table.

That wave is coming to cannabis. This industry has sat out the modern era but it’s not immune to market forces.

We’re seeing the early signs now as the biggest commodity cannabis producers (the companies that actually grow and harvest the plant) absorb their smaller rivals and accept strategic partnerships from more mature industries.

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Money is flowing. Big Beverage, Big Tobacco and Big Pharma want to make sure they have an invitation to the party. Every venture capital firm worth its business cards wants a little cannabis in the portfolio to show clients.

What this means for my Cannabis Tracker is that I can only grade most of the Big Cannabis cultivators — Tilray Inc. (NASDAQ:TLRY), Aurora Cannabis Inc. (NYSE:ACB), Cronos Group Inc. (NASDAQ:CRON) and Canopy Growth Corp. (NYSE: CGC) — “average” right now.

Some configuration of these companies will ultimately dominate legal cannabis. They have vast theoretical growth potential, but that potential isn’t infinite. Ultimately, demand will plateau before they run out of production capacity.

The opportunity on the map can triple. That’s a problem when even the optimistic math requires these companies to boost their sales 8-25 times to reach profitability.

They’ll need to compete more aggressively, pushing wholesale cannabis prices down and small-scale rivals out of the market. Ultimately, the smart ones will either buy out the rest or accept a buyout bid.

But of the group, only CRON currently looks like it can make it all the way on its own, even under ideal conditions. And odds are good that too much supply will create a little turbulence.

I do like one of the Big Cannabis growers and you can probably figure it out with a little detective work. If not, it will show up in Turbo Trader when the chart flashes the right signal.

Here, however, I’d rather focus on a cannabis-linked stock that earns a higher grade. Cara Therapeutics Inc. (NASDAQ:CARA) is still small, not even $800 million in market capitalization.

The company has discovered a way to exploit the chemical channels cannabis uses to block pain signals. It could render opioids obsolete. And while the first programs are still years from a Food and Drug Administration (FDA) decision, every day takes CARA closer to that point.

Unlike Big Cannabis, the opportunity is truly close to infinite. But CARA isn’t a one-drug company, either. It has other programs that are much more advanced and closer to turning into real revenue.

If you’re eager for exposure to a real company with real prospects, this is a good place to start.

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