Market News: 12/04/2018Submitted by Executive Wealth Management on December 4th, 2018
One of the hot topics for investing this year has been how to access the expanding market for legalized marijuana. Trend followers have excitedly bid pot stocks up, then down, then up, then down again in the hopes of striking it big. As a result, the public companies that focus on marijuana have been spectacularly volatile over the course of 2018. This tiny market segment has become a speculator’s haven.
We see in the chart below that the average volatility of the top 10 holdings in ETFMG, a leading marijuana ETF, is 94%, versus 15% for the S&P 500 and 49% for ETFMG overall. Many of these companies are not far removed from what analysts call the pre-revenue stage - the period in a company’s evolution where its product concepts are still being developed and there is no steady stream of sales. In fact, the largest company in the fund only had 78 million CAD (Canadian dollars) in revenue over the last twelve months (abbreviated as LTM in the chart). Now, the sales projections over the next twelve months (or NTM) are mouth watering — if they are realized. However, even with greater than 500% growth in revenues, many of these companies are trading at ridiculous valuations—one such metric, enterprise value (EV) to sales is shown in the chart. We urge caution when trying to pick winners in this race. Remember that these companies are producing a commodity product. Sales may increase, but brand loyalty and high profit margins can be difficult to obtain when customers see the various companies’ offerings as interchangeable.