No Trade Deal? No Big Deal

Hilary Kramer

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

If you’re wondering where all the Federal Reserve euphoria went, look toward Osaka, Japan, where investors around the world will be looking this weekend for hints of either a trade breakthrough or a full-fledged global breakdown.

As far as I’m concerned, the G20 summit is always more noise than substance. Big deals don’t get made or even announced at these meetings. If we even get a public statement of intent out of this, I’ll be shocked.

I go into detail on my logic and my timeline in this Reuters interview. Basically, any bad news from Osaka is good news because it will give the Fed cover next month if it opts to cut interest rates. Any good news, of course, is also welcome.

But we need to get through the weekend first, which is why I think the Fed has drifted off Wall Street’s radar and China-linked stocks from Apple Corp. (NASDAQ:AAPL) through Caterpillar Inc. (NYSE:CAT) are once again feeling the pressure.

That’s a mistake. Those stocks already are priced to reflect not just the status quo on trade, but a substantial deterioration in the underlying companies’ ability to move products between factories on one side of the Pacific to customers on the other.

Apple, for example, depends on Chinese buyers for 20 percent of its revenue. The stock is down 15 percent from its pre-trade-war peak, so on a price-per-sales basis, investors are effectively telling us they expect 75 percent of that Chinese market for iPhones to go away.

They might not say so explicitly, but that’s what the numbers add up to. If you believe three out of every four iPhone users in China are going to switch in the next product cycle, the stock is fairly valued now.

But if you think like I do and believe that a that a trade deal is coming and sales will continue as usual, this is a great time to buy stocks like Apple on the dip.

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We’ve discussed chip stocks like Broadcom Inc. (NASDAQ:AVGO) and Qualcomm Inc. (NASDAQ:QCOM) here in the past. A similar logic applies here too.

Look at Broadcom. Sellers had priced in a near-total trade embargo, but when management finally cut guidance, it was only to confess that about 30 percent of the Chinese demand base was going off the table and taking 15 percent of overall revenue with it.

Losing those customers stings, but when your stock is down close to 25 percent, the future is going to be a little brighter than the worst-case scenario had suggested. Broadcom recovered fast in relief. It’s fairly valued now.

A lot of stocks are like that. Whatever happens this weekend, the sentiment is skewed toward disappointment. However, the S&P 500 doesn’t reflect any good news or even much hope as it is.

Remember, even after months of trade tensions, the earnings aren’t going over any visible cliff. Lower taxes and a robust domestic economy will make sure of that.

All that’s happened is that year-over-year growth has gotten scarce. The kinds of stocks that make it to my Value Authority service are coming into their own.

Investors are looking to lock in yields, especially if the Federal Reserve follows through and cuts interest rates. Treasury bonds paying under 2 percent a year just can’t compete with real dividend-paying companies.

And it makes true organic growth especially precious. That’s why I’m loving a few recent IPOs.

Beyond Meat Inc. (NASDAQ:BYND) will be interesting at the right price once the chart fills in. Chewy Inc. (NASDAQ:CHWY) is a similar story.

Neither of these stocks depends on Chinese markets. They’re pure domestic opportunities. When will they make it into my GameChangers list? Only my subscribers will know for sure.

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You can love a business and hate the business model. On some weeks, that’s how cannabis investors feel. This was one of them.

The regulatory map didn’t close. If anything, legalizing recreational cannabis use in Illinois has widened the overall market opportunity by another 11 million Americans. That’s great news for anyone trying to calculate peak demand.

Unfortunately, peak supply for the raw product is nowhere in sight. That’s why I wasn’t thrilled to see Canopy Growth Corp. (NYSE:CGC) follow up its disappointing quarterly results with promises that it’s planting even more acres and hoping to put even more raw product on the market later this year.

From everything I’ve seen, Canopy doesn’t have a supply problem. Their recent revenue indicates that their harvests are already big enough to support four million retail dispensary visits a year.

Adding another seven million square feet of cultivation will double that potential crop. That’s great if your addressable market is doubling. If so, you’ve just doubled your sales potential.

But Canopy either has a demand problem or, if we’re charitable, a competitive problem. Recreational sales are down quarter to quarter and that includes the transfer of $8 million in medical products to that side of the cash flow statement.

If this was a captive market, there would be no problem. But these aren’t iPhones. These are commodity products, barely one step up from the raw plant, and a lot of other growers are muscling for market share.

Furthermore, endless acreage is available. Canopy needed to plant 160 acres of Saskatchewan farmland to double its harvest. There are seven million acres under cultivation in that single Canadian province right now.

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If only one Saskatchewan homestead converts from winter wheat to cannabis, the commercial market will need to absorb five times as much supply as Canopy will deliver this year.

Demand isn’t going to quintuple any time soon. While it is growing faster than just about anything else in the consumer economy and the base is still small, planting new acres is not a solution.

That’s why I haven’t recommended one Big Cannabis stock yet in my “Marijuana Millionaire” portfolio for Turbo Trader subscribers. They’ve got great production profiles and are making a lot of money in a fragmented and rapidly evolving marketplace.

As stocks, the big growers still need a lot of work. Investing is serious stuff, even if it’s in an industry that’s often considered leisure-oriented or “fun.” We don’t pick Netflix Inc. (NASDAQ:NFLX) over Walt Disney Co. (NYSE:DIS) just because we watch the shows. It is all about cash flow and valuations.

That’s why I wasn’t pleased to see Canopy slip a joke into its Saskatchewan press release. Its management felt it was important to let us know that the new field will be “patrolled by drones (kidding — no drones, promise).”

Maybe they wanted to keep it light and have some fun. Wall Street hates that. Investors can laugh and relax after the trading day is over.

A week after that “fun” press release promised us that Canopy was in position to double its revenue, the stock is down 7 percent. There are enough serious stocks in this industry that we don’t have to put up with that.

Our “Marijuana Millionaire” stocks are up 6 percent in roughly the same time-frame. We can have fun on our own time.

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