Cannabis Corner: When Do These Stocks Get ‘Cheap?’

Hilary Kramer

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

It has been another defensive week for the big cannabis cultivators, bringing their collective losses in the last six months to 60 percent. That’s a profound discount on stocks that had bright futures back in June.

The only question is what it will take for Wall Street to recognize when there’s clear value here. After all, Tilray Corp. (NASDAQ:TLRY) shares that were priced at $45 over the summer are now on sale for under $20.

Sales haven’t cratered. There’s no consumer backlash against marijuana sales in Canada or any other legal jurisdiction. Tilray is still tracking $175 million in revenue this year.

And while the immediate outlook has hit a few bumps along the way, it’s hard to argue convincingly that any company growing the top line 75 percent a year is dead money. By normal standards, that’s still an extremely robust expansion curve.

Granted, six months ago I thought Tilray would clear 100 percent sales growth in 2020, so if that’s your criterion, you have a right to be disappointed. Realistically speaking, at these speeds, the difference only slows the company’s route to profitability by a month or two.

Management insists that positive cash flow is coming within the next year anyway, so sustainability is only months away in any event. Shareholders aren’t being asked to wait anything like forever.

Admittedly, a lot of hope is already crowded into any high-growth stock. People were buying Tilray at 12X anticipated 2020 revenue back in June. Now the bar is lower and it’s on sale for less than half that valuation.

In a world where established giants like Inc. (NASDAQ:AMZN) rarely rouse beyond 3X sales, these multiples are still high. But they’re far from unique or unprecedented.

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Shopify Inc. (NYSE:SHOP) is one of Wall Street’s favorite stocks. It’s rallied 170 percent this year and while it’s profitable, it commands a nosebleed 20X 2020 revenue.

We can debate whether it’s worth that lofty price-to-sales multiple, but the point is clear. Stocks can sustain much higher price-per-sales math than Big Cannabis all the time. There’s nothing special about the numbers that point to a bubble that inevitably bursts.

All Tilray or Shopify need to do is keep expanding fast enough to grow into a stock price. I think both of these companies can do that.

And there are dozens of small technology stocks with a similar profile. Very few are growing as fast as Tilray. While it hasn’t been a great season for growth, they aren’t down 60 percent either.

If Big Cannabis sold cloud computing software instead of dried plant product, these stocks would still be flying high today. While there are differences in the business models, the math actually leans toward the cultivators now.

A year from now, if Tilray grows to the point where it can squeeze $0.02 of profit per share out of its business, the example of Shopify tells us that it theoretically can support a 20X sales multiple.

In that scenario, Tilray could be worth $100 a share. But until then, it’s clear that the market isn’t eager to buy yet. When it does, my Turbo Trader subscribers will be in position early enough to make real money, without having to spend a year trapped in the stock.

Join me for the Orlando MoneyShow, February 6-8, 2020, at the Omni Orlando Resort at ChampionsGate. I will be speaking Friday, Feb. 7, 3:00 p.m. about The Stealth Value Investor: Ten Amazing Dividend Yield Plays Flying Under the Radar. On Saturday, Feb. 8, I will talk at 5:15 a.m. about Identifying the Real Future GameChanger Stocks: Ten Companies Positioned to Double – Even if the Bears Take Over Wall Street. Other investment experts who will be speaking include retirement and estate planning specialist Bob Carlson, income and options expert Bryan Perry and world-traveling, free-market economist Mark Skousen, who leads the Forecasts & Strategies newsletter. Register by clicking here or call 1-800-970-4355 and mention my priority code of 049252.

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