The posterchild of mania

I just came back from China where I couldn’t access to my Google based blogs. Hence no posting for last week. While in China, I was trying to get some sense about the potential impact from the ongoing trade conflict with the US. Due to very limited time I had, I certainly couldn’t get a comprehensive evaluation of it in any sense but I still got two different viewpoints: not much impact from people representing more general citizens and feeling more worried about the country’s prospects if the “trade war” continuing from those more involved in the business circle like fund managers or businessmen. Apparently, those businessmen have already felt or observed the pain and deterioration in doing business to various degrees. 

Now back to the topic of today. From time to time, we will experience different manias, which will push the underlying asset to bubble then burst. Although our human beings have been evolved and progressed tremendously in all aspects for thousands of years, one thing has never really changed: greedy and chasing hot stuff with herds! Need examples? Just think what happened during the dot.com frenzy in late 90s or housing crazy prior to 2008. More recently we have just witnessed the mini mania for bitcoin when it shot up 10 times within a couple of months, followed by a painful downfall that is still ongoing. But it seems people will never learn the lesson and whenever there is some hot stuff, a period of FOMO (Feel of Missing Out) will ensue. The hottest thing right now is no doubt: marijuana! Well, the marijuana trend is not really new and has actually started for a couple of years. Granted I personally also think this is a megatrend that will turn into a very big market. I especially like its tremendous potential in the medical uses and have talked about it months ago. I have even told you how my beloved stock, Microsoft has moved into this space as well (see here). For savvy investors, you want to get in something that has started its trend but has not attracted much attention yet. For those (including myself) who have done so, they should be happy to buy low when no one was interested in it. It had been a quiet journey till a few days ago when all the sudden it seems a gigantic gold mine has been found and all the people are rushing into it. I don’t know what has really triggered the mania but it came very fast and forcefully, especially for one particular marijuana stock, Tilary Inc (TLRY), a “once tiny” Canadian stock not existent even two months ago as it was just recently IPO’ed in the US Nasdaq. Now first let’s be clear, Tilary appears to be a very legitimate Canadian company specialized in the marijuana business. It is the first marijuana stock listed on a major US exchange and has got good attention when going through its IPO and finished its first day with a price of $22 back on July 19. With just a minor weakness following the IPO, it has basically been in a straight line up for the past two months. The mania came a few days ago when it jumped 50-100% for a couple of days, from about $100 at the beginning of the week to $300 on Wed. Presumably one of the major catalysts for the manic move was the news that Coca Cola (KO) was considering to enter into the marijuana space. Let’s put aside KO for now. With a $300 share price for Tilary, investors valued the company at more than $20 billion for its current sales of just $28 million. In other words, we are talking about a price-to-sales ratio (P/S) of over 700! Do you have any idea what this means? If not, let’s just do some basic comparison. The average P/S for the S&P 500 stocks is just about 2.3. For fundamental analysis, anything beyond 10 for P/S would be considered very expensive and should not be touched. Or if you still don’t quite get the sense how expensive the stock is, let’s put this way. If you buy the stock at $300 per share and let’s say the company will return all the sale revenue back to you as dividend without paying any tax or spending any money on its R&D etc, it will take more than 700 years to make you break even. This is how expensive the stock is. Talking about the insanity with the unbelievable exuberance we are seeing right now in the market for marijuana!  I hope none of you have got the FOMO to buy TLRY now or any marijuana stocks for the moment. It is simply not sustainable when the price move is purely based on emotional euphoria, not supported by the fundamentals. Interestingly, the euphoria for TLRY is fading as fast as it came. In the past two days, it has given back all it gained in the past week and is back down to low $100s today! Honestly I was even thinking to short it but it was too expensive to do so. So I’m just watching the saga unfolding.                         

While I by no means think the marijuana trend has ended already, I won’t be surprised to see more severe corrections for the whole space in the months ahead. If you want to get in, don’t do so simply because it is hot and everyone is buying it. That will usually be the moment when a correction will follow, which could be short-lived or persistent for long time.