Getting Into The Weeds

My latest article, Getting Into the Weeds, hit #1 on Seeking Alpha! It’s an extension of The Intelligent Investing Podcast I did with Eric Schleien (GSCM). Eric’s podcast is doing very well and about to break the top #100 in the investment space.  In the article I take the time to dig deeper into specific sector of the marijuana industry.  With the legalization in Canada coming tomorrow (October 17) it’s good to have a sense of the buzz surrounding the space.

Just to be clear, I’m not an investor in the space. I’m also not recommending investing in the space. While on the sidelines, I know a lot of people making plenty of easy money on cannabis stock. We have seen Canopy Growth (WEED) go from $2 to $75 in a very short-time. Tilray, a company with just $20 million in first-half revenue, was briefly worth $30 billion. That’s more than Twitter, CBS, Harley-Davidson, Fitbit and American Airlines. At its height Tilray’s enterprise value surpassed 85x bullish estimates for its 2020-year sales and 340x that year’s estimated cash flows. Fast easy money is tempting and contagious. I’m happy for them but I believe the party is not going to last. We have seen this story repeat itself in the past.

To me the investor’s high on the marijuana sector is a red flag, and signaled that a sobering up may be imminent. The speculative craze is fueling a future crisis. This is the same story that repeats itself over and over. The tech bubble that ended in 2000, the pre-crisis U.S. housing craze, and the cryptocurrency bubble are some of the most recent examples of speculative manias. In each case, a defensible investment thesis – that technology will eventually dominate the economy, American housing prices could only move in one direction, and the blockchain was going to revolutionize everything – was extrapolated to a form of ridiculousness where no price was too much to pay for related investments.

There are some serious questions about just how profitable these companies can become under legalization. I think most investors do not understand what the space looks like, how competitive it is, what the margins look like. Distribution costs, advertising and sales taxes will further erode profit margins and cause price compression, possibly squeezing companies whose production costs are too high out of the market. Some of the companies that have gone public suffer from weak management, and investors need to be ready for a fall in marijuana prices because too many suppliers have entered the market. I see the valuations being attributed to places that have virtually no production, virtually no off-take agreements, which don’t operate in multiple countries and have a very limited R&D.

I’m not a market timer, I don’t have a crystal ball, and I don’t what’s going to happen. But I know that a company without profits can’t survive in the long-run. Right now these stocks are being valued like junior mining companies. They are valued in the “promised” of future riches. Eventually, once they start producing (legal sales in our case) they are valued based on their fundamentals (cost, margins, distributions, market, profits etc.). This is similar to a junior mining company transitioning from exploring to producing.

It’s a space that I suggest proper judgement.

Article: Getting Into The Weeds

Podcast: #36: Getting into the weeds on marijuana stocks (we aren’t so high on them) + Update on BAM & TSLA Itunes, Google. First 23 minutes is a recap on Brookfield Asset Management and Tesla. Weed talk at the 23 minute mark.

Enjoy!

Brian

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By Brian Langis

• Canada is legalizing marijuana for recreational use on October 17, 2018.
• The changes that are underway closely mirror the process that alcohol went through after prohibition ended in the 1920s: liquor regained social acceptance and the product proliferated.
• Investors need to figure out what something is worth and try to buy it for less. Investing in the marijuana industry is not different in that regard.
• Most investors do not understand what the space looks like, how competitive it is, what the margins look like. There are questions about just how profitable these companies can become.
• The long-term prospects for marijuana are very positive. The question is how much are you willing to pay for it?

The cannabis sector has been on a two-year high. Cannabis related stocks are trading at sky-high valuation. “The sky is the limit” as the saying goes. Since August, the segment has surged to a new level of hysteria on a wave of announcements. The sector got a boost when Constellation Brands (STZ), the brewer of Corona and Modelo, agreed to add $4 billion to its investment in Canada’s lead weed company Canopy Growth (CGC, WEED). The hysteria got a new boost when Coca-Cola (KO) confirmed an interest in spiking sports drinks with cannabidiol (NYSE:CBD), the non-psychoactive ingredient of marijuana. And thanks to the DEA approving Tilray’s (TLRY) plan to import pot from Canada, a company with just $20 million in first-half revenue was briefly worth $30 billion.

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Podcast: Getting Into the Weeds

I had the privilege to be back on The Intelligent Investing Podcast with Eric Schleien (GSCM) to talk about the cannabis industry. With the legalization of marijuana tomorrow in Canada (October 17, 2018), it’s good to get  sense of what’s going on in the space.

The first 23 minutes is a re-cap of the previous two podcasts we did together. We looked at what happened to Tesla and Brookfield Asset Management since. On the subject of Brookfield, they recently had their investor day in NY and all their presentations are posted on their investor relation website here. I suggest you take a look at that great company.

Then we get into the weeds.  Choose you favorite platform to listen:

#36: Getting into the weeds on marijuana stocks (we aren’t so high on them) + Update on BAM & TSLA

• Podbean
• iTunes/Apple
• Play Google
• Stitcher
• PlayerFM

What’s Wrong, Warren?

Below is the article published on Warren Buffett on December 27, 1999. The dot-com bubble of the late 90s was a wild time for the stock market. People quit their jobs and became millionaires day-trading tech stocks. Buffett didn’t want anything to do with the high-flying stocks. Chimps were having better returns.

On December 27, 1999, Barron’s published a piece entitled, “What’s Wrong, Warren?” which suggested “Warren Buffett may be losing his magic touch.”

A bullish BRK analyst (Russ) in the article was comparing Yahoo to Berkshire. “Berkshire’s market value is less than Yahoo‘s, yet Berkshire could earn $2 billion after taxes in 2000, while Yahoo will be lucky to make $200 million.” Berkshire now is valued at $83 billion, while Yahoo has a capitalization of $120 billion. Russ believes that Berkshire could double over the next several years.”

In December 1999, Yahoo’s market cap was worth 120 billion and BRK 83 billion. Last year Verizons bought Yahoo for $4.5 billion and Berkshire is now worth over $500 billion.

It was probably not Barron’s shiniest moment.

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Reposted from Barron’s
By Andrew Bary

After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch.

Shares in Buffett’s Berkshire Hathawayare set to experience their first annual decline since 1990 and their second-worst year of performance, relative to the Standard & Poor’s 500 Index, since Buffett took control of what had been a struggling New England textile maker in 1965.

At around $54,000 a share, Berkshire’s Class A stock is off 23% in 1999, against an 18% return for the S&P 500 (including dividends). Berkshire has been hurt this year by weak operating results at its core insurance operations and by a rare annual drop in the company’s famed investment portfolio, which includes such stocks as Coca-Cola, Gilletteand American Express.

But there’s more to Berkshire’s weak showing than just the operating and investment performance. To be blunt, Buffett, who turns 70 in 2000, is viewed by an increasing number of investors as too conservative, even passe. Buffett, Berkshire’s chairman and chief executive, may be the world’s greatest investor, but he hasn’t anticipated or capitalized on the boom in technology stocks in the past few years.

After the Crash – Wall Street Week Oct. 23, 1987

Composite of newspaper headlines reporting the Stock Market Crash of 1987 (Associated Press)

Thank you to value investor François Denault for the find.

The interview is hosted by Louis Rukeyser, guests included one of the world’s best investor: John Templeton, Steven Einhorn and William Schreyer. It was taped just after the market crash on Black Monday October 19 1987. That day The Dow Jones index fell exactly 508 points to 1,738.74 (22.61%), it’s largest daily percentage losses in history. You can tell from their display of emotion that this was not a normal week. The show starts at 1:44 min and the host had to reassure the viewers that they “just lost money and not their life”.

I wonder how people would react today to a catastrophic drop this big. Just look at the hysteria when the stock market goes down 2%. I can’t imagine the punch in the stomach of 22% drop.

By the way in 1987 there was no recession at the time and the Dow finished the year in the positive.

Bruce Flatt of Brookfield on owning the backbone of the global economy

Reposted from The Financial Times
By Peter Smith

It is a windy Tuesday in London and from a Canary Wharf skyscraper, Bruce Flatt, chief executive of Brookfield Asset Management, surveys a corner of his global empire.

Close by is Newfoundland, 62-storeys of homes for rent beside the Thames. In the distance, nestled among City of London towers, is 100 Bishopsgate, a 37-floor office building under construction. To the right, in fashionable Shoreditch, the 50-storey residential Principal Tower is taking shape.

What about the West End, which is studded with cranes? No, nothing there is big enough for Brookfield. “The sites are small and our advantage is scale,” says Mr Flatt.

Toronto-based Brookfield keeps a low profile but its scale is vast. In 20 years under Mr Flatt, it has become one of the largest real estate and infrastructure investors, with a footprint in 35 countries.

Paul Singer, Doomsday Investor Notes

Paul Singer from Elliot Management. Source: Wikipedia and World Economic Forum

Sheelah Kolhatkar from The New-Yorker wrote a long-form piece on Paul Singer and Elliot Managment. Like most pieces from the New-Yorker, it’s long and very detailed. Sheelah wrote a great article on one of the most feared and successful investor. Below are some of the notes:

• • Paul Singer, the head of Elliott Management has developed a uniquely adversarial, and immensely profitable, way of doing business.
  • Singer grew up in the Bronx and in Teaneck, New Jersey, one of three children of a pharmacist father and a homemaker mother. Paul is now 73 years old. Elliot is his middle name.
  • Singer is deeply involved in everything Elliott does.
  • The firm has many kinds of investments, but Singer is best known as an “activist” investor, using his fund’s resources—about $35 billion in AUM—to buy stock in companies in which it detects weaknesses.
  • Elliott then pressures the company to make changes to its business, with the goal of improving the stock price.

Mad Cow Disease and Brexit

Don’t jump to conclusion but…I see a positive correlation.

Durable Principles for Real Asset Investing

I got my hand on a copy of the presentation Bruce Flatt from Brookfield Asset Management (BAM) did at Google. Here’s the video of the Google Talk presentation.

Here’s the Talks at Google – Brookfield Presentation – Aug2018 and below are my favorite slides. It’s a good guideline to follow if you want to became a better investor.

I want to start my three favorites slides:

Dubai in 1991 and today:

Dubai 1991

Dubai 2018

And a visualization of contrarian thinking:

The Way to $1 Trillion

Yesterday Apple announced new iPhone models that will be bigger, will be better, faster, stronger, and—of course—more expensive. Over the summer Apple (AAPL) passed the $1 trillion in market cap value milestone. Amazon (AMZN) followed not too long after. Today one share of Apple cost $224, up 32% just in 2018.

If there’s one stock that analysts couldn’t get right, it’s Apple. Not because they are not smart. It’s the opposite, most analysts are very brilliant. The problem is that analysts are stuck playing the short-term quarter to quarter game of guessing how many iPhones Apple will sell. Apple has over 100 analysts following the company. At this moment last year, when the iPhone X was announced, analysts were saying the cost of the iPhone was too high and sales would slow down, and the stock would fall. Following Q2-2018 results, analysts changed their tune when Apple blew  the estimates out of the water. Analysts are now saying that because the iPhone X was selling so well it would eat into future revenues.  Analysts insights are interesting, but if you are a retail investor, I suggest to do your own homework and invest with a long-term horizon. And ignore the short-term noise.

How did we get to $1 trillion? The Ringer made this interesting 7 min long video.

A year and a half ago I wrote this article on Seeking Alpha. Apple was trading at $106 a share. Apple was a 205-bagger from 1990 to March 2016, without calculating dividends. But it wasn’t an easy ride. You needed an 80% loss twice in order to get it and the large majority of the gains came after the iPhone was released in 2007. This is not your classic buy and hold fairy tale. Below are a couple tables and charts that display Apple’s rocky ride to $1 trillion.

The first table summarized Apple’s stock price since the IPO in the early 80s. It wasn’t necessary a good time to buy and Apple was on survival mode for over the next decade. The stock hover around $0.50 to $2 for the large part of its existence.

This second chart shows that the multi-bagger gains came after 2007, when the iPhone was released.

Below is a 10-year chart of Apple financials. Look at the revenue growth, going from $37 billion to $229 billion at the end of fiscal 2017. And it is still growing….

Bruce J. Flatt “Durable Principles for Real Asset Investing”

Bruce Flatt, the CEO of Brookfield Asset Managmement (BAM), has made a rare appearance at Google for one of their Talks (video below). The most striking thing about the presentation is the lack of people that showed up to listen to one of the world’s most successful investors. In the screenshot below of the presentation, I count 10 people. Let’s say there were 15 people. If they paid any attention, these 15 people are now much better investors. I’m not sure how something like this happens. I can see 10 people showing at a talk in the basement of a church, but this is Google we are talking about, and Google is located in Silicon Valley with all that money and investors. My guess is that nobody knows who Bruce Flatt is.

The lack of people is a testimony to the low profile of Bruce Flatt and Brookfield Asset Management. Unless you are in the investment world, most people have no idea that they own some of the world’s most precious real estate with with $285 billion in assets.

I see 10 people. 

I have written an elaborate article on BAM in the past (read here) and it was also the subject of a podcast I did (listen here). Here is the video: