Outsider Question of the Week, Oct. 18

Outsider Club's Weekly Reader Question "Is pot a bubble?" — Dennis R. NICK HODGE | Founder Yes. But lots of money is made in bubbles. You remember crypto, right? Unlike crypto, however, cannabis is a real consumer product with pent-up demand. And there will be a giant vacuum created as country after country continues to legalize. The valuations right now are insane given that Ca You are receiving this email because you subscribed to Outsider Club. [Click here]( to manage your e-mail preferences. [Outsider Club logo] By Outsider Club Written Oct. 18, 2018 Outsider Club's Weekly Reader Question "Is pot a bubble?" — Dennis R. --------------------------------------------------------------- NICK HODGE | Founder Yes. But lots of money is made in bubbles. You remember crypto, right? Unlike crypto, however, cannabis is a real consumer product with pent-up demand. And there will be a giant vacuum created as country after country continues to legalize. The valuations right now are insane given that Canada is the only G20 nation that has legalized so far. The market caps of the big players like Canopy Growth, Aurora Cannabis, and Aphria are individually larger than annual cannabis sales are expected to be. But the U.S. market is 10X larger, and the world larger still. And investors are valuing these companies as though they are already players in a globally established market. So you will see some sort of reckoning I think after a few quarters of Canadian sales. The wheat and chaff will be separated (or the buds from the stem, as it were). We’ll see who’s been talking and who’s been walking. You will see that some companies are greatly overvalued and some that aren’t in the spotlight yet, but have been working quietly to build real businesses, are undervalued. The valuations will meet somewhere in the middle. Real sales are coming. More markets will open up. And I believe there is a very profitable future ahead for the cannabis industry and its investors once it reaches cruising altitude. We’ll have to get through some turbulence first, and that’s why Jimmy and I (but mostly Jimmy) continue to research and recommend the top cannabis companies for you. --------------------------------------------------------------- [Jimmy_mengel_2018_250x285]JIMMY MENGEL | Managing Editor "Give fools their gold, and knaves their power; let fortune's bubbles rise and fall; who sows a field, or trains a flower, or plants a tree, is more than all." — John Greenleaf Whittier, Quaker Poet Marijuana stocks may be a "bubble", but that depends on your definition of a "bubble." I usually hear about the dot-com bubble, where companies like Pets.com raised $300 million and crashed into the ground when they couldn't follow through on anything they were saying. Many of the dot-com stocks didn't operate in something real. One thing people have to realize is that pets weren't illegal in half of the country. There weren't prohibition-style clampdowns on pets globally. The pet market wasn't about to expand 10-fold over the course of a year or two. Marijuana is. The cannabis industry is literally growing something for the future. It is producing tangible products that millions of people have already been using, and that millions more will start using for the first time. The global demand is there. The domestic demand is there. And there are plenty of great companies that are not currently caught up in the overvalued frenzy. Marijuana has barely scratched the surface of its ultimate potential and it's been reported that it will reach $146.4 billion in sales by 2025. In other words, plenty of room to grow... That being said, as an investor, you need to identify the companies that are thinking ahead. Some of the current crop of companies — Tilray being a good example — are way overvalued. These stocks will come back to Earth. Others are undervalued and will be responsible for the next round of moonshots... In fact, I was in Canada yesterday — the day they finally legalized cannabis. I visited a company that is trading at a perfectly un-bubble-like valuation, that has forward-thinking plans to expand, and has its eye trained on high-margin products that will deliver for consumers and investors alike. Call "bubble" all you want, but remember, bubbles always have their winners. I'm sure Jeff Bezos is laughing hysterically anytime someone complains about the dot-com bubble. Amazon could have been another Pets.com, but the company stuck to its guns and quietly executed for years. He's now the richest man in the world. Many of these new Pot-trepenuers will be in the same mold. You just have to know which ones to bet on. --------------------------------------------------------------- Adam English | Editor There is no doubt that the publicly traded pot companies are in a bubble. There just isn't enough room in publicly traded companies for the amount of investors and the amount of money they want to commit to getting into the pot sector early. Just look at the Tilray run. It was completely divorced from reality. It pulled in $20.5 million in 2017 while its market capitalization is at $14 billion. It'd take 683 years to make that back if sales were flat. That isn't a great metric, but we can't use price-to-earnings because the company is seeing accelerated earnings losses. It's gone from pulling in $5 million in revenue but posting -$679,000 in earnings in the first quarter of 2017 to pulling in $9.74 million in revenue but posting -$12.83 million in earnings in the second quarter of 2018. Yes, the company will see fantastic growth, and that's why investors are piling in. But there is no regard for the amount of time it will take. Whenever investors completely ignore the fact that a company will have to actually make money one day, you're probably getting into bubble territory. Having said that, there is fantastic long-term potential worldwide for pot companies, especially those pursuing medical uses, from CBD oils to designer pharmaceuticals. This is the kind of bubble where investors get ahead of themselves and share prices collapse. However, share prices can and will continuously reflate based on the huge potential of this entirely new sector. As more countries legalize, the long-term trend will be continuously upward for years, if not decades to come. It's just going to be a very bumpy ride. --------------------------------------------------------------- To [learn more about our editors](, visit our website. 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