The IPO Frenzy Rolls On
The IPO frenzy rolls on... Investors continue to rush into profitless new companies... Checking in on cannabis stocks... Why the Cannabis Capitalist remains as bullish as ever...
Regular Digest readers know we've seen a boom in initial public offerings ('IPOs') this year...
In fact, the recent frenzy to buy up shares of newly public companies has been reminiscent of the late '90s Internet bubble. As our colleague Alan Gula noted in the May 7 Digest...
A growing number of stocks are popping 50% or more on their first day of trading. The following table shows the top 10 IPO performances over the past year...
Last month, German e-commerce company Jumia Technologies (JMIA) and remote conferencing services provider Zoom Video Communications (ZM) both went public, surging more than 70% on their first day of trading.
We're in the midst of an IPO frenzy. It's clear that many investors are experiencing the "fear of missing out."
Of course, as Alan also pointed out, this trend of huge first-day gains isn't the only similarity to the dot-com boom. More from that Digest...
Last year, around 84% of IPOs were issued by unprofitable companies. That's the highest percentage since the tech bubble in 1999-2000, when 86% of IPOs were unprofitable...
This year, the parade of profitless IPOs has continued. And many of them have obscene valuations.
The frenzy has continued since then...
This week, investors rushed to buy shares of three more popular – yet profitless – newly public companies.
Shares of cybersecurity company CrowdStrike (CRWD) soared more than 70% following its IPO on Wednesday.
Freelance marketplace Fiverr International (FVRR) jumped more than 45% from its offering price yesterday.
And online pet-product retailer Chewy (CHWY) became the latest this morning. As the Wall Street Journal reported early this afternoon...
Chewy posted strong gains in its market debut Friday, reflecting continued strength in initial public offerings of e-commerce companies despite some high-profile stumbles among consumer-technology firms.
Chewy's stock opened at $36 a share, up 64% from its IPO price of $22 a share...
The company had $3.53 billion in sales in its latest fiscal year, an increase of 68% from fiscal 2017. But the company had yet to reach profitability, reporting its net loss narrowed to $267.9 million in the year ended Feb. 3 from $338.1 million in the year-earlier period.
This is exactly the type of behavior you often see in the final 'inning' of a major bull market...
If Steve Sjuggerud is correct about the "Melt Up" – and history suggests he will be – we could see even greater excesses before it's all said and done.
But make no mistake... The clock is ticking. And what comes next will be no ordinary bear market.
Of course, there's one trend we expect to continue almost regardless of what happens next...
We're referring to the rapid growth of the legal cannabis industry.
Longtime readers know companies that cater to "vices" tend to make fantastic long-term investments. The reason is simple...
People will continue to smoke cigarettes (or e-cigarettes), drink beer and soda, and eat candy and fast food through good times and bad. In fact, demand for these products often rises when things get really bad.
While we expect cannabis will ultimately be valued for far more than its recreational use, consumer demand for cannabis products should be similarly "recession proof."
Better yet, the U.S. market for legal cannabis is likely to grow substantially from here...
As public acceptance has risen in recent years, more and more state and local governments have been loosening restrictions. Already, 10 states plus Washington, D.C. have declared marijuana fully legal to those older than 21. But this trend is just getting started...
Last month, the California State Senate passed a bill that would allow private banks and credit unions to apply for state charters to explicitly handle cannabis financial transactions. The state's assembly and California Gov. Gavin Newsom must approve the legislation before it becomes law.
On Tuesday, legislators in Oregon passed a bill that would allow the governor to enter agreements with other states for the transfer of marijuana. The measure would set up the state to provide cannabis if the U.S. government ever permits interstate sales.
According to the Associated Press, state Sen. Floyd Prozanski, who sponsored the bill, said he was looking forward to a time when the federal government would legalize interstate sales or say it would tolerate the practice. "We will kind of be like what [Kentucky] is to [bourbon]" he said.
And earlier this month Illinois became the first state to pass a bill legalizing marijuana sales through the legislature. The bill now heads to the desk of a governor who campaigned on legalizing marijuana.
For now, cannabis remains illegal on the federal level...
But we're already seeing the first signs that the "tide" is shifting. Most notably, the Secure and Fair Enforcement ("SAFE") Banking Act continues to gain traction in Congress.
This bill would open up the U.S. financial system to legal cannabis businesses for the first time. And as we noted last week, it now has more than 200 cosponsors from both parties in the House of Representatives, as well as support from the attorneys general from 38 states and territories.
We believe it's likely just a matter of time before federal cannabis regulations are loosened significantly. And when they are, hundreds of millions of new potential customers could enter this market virtually overnight.
Still, there's no sugar-coating it...
Cannabis stocks have been punished lately.
While the benchmark North American Marijuana Index is up about 30% for the year – close to double the return of the S&P 500 – it has plunged roughly 16% since the start of May.
But as our colleague Thomas Carroll reminded his Cannabis Capitalist subscribers yesterday, the "big picture" remains as bullish as ever. As he wrote in the June issue...
Many people like to compare cannabis legalization and decriminalization to the end of the prohibition of alcohol. But the Prohibition analogy sells the cannabis revolution short. It's bigger than that... much, much bigger.
Cannabis lets users relax and unwind in ways that don't leave you with a hangover or feeling groggy the next day. The market for alcohol in the U.S. generates $100 billion a year. Maybe you smoke a cigar, a pipe, or cigarettes to take a break. Tobacco accounts for another $100 billion a year.
A portion of the money people now spend on booze and tobacco will shift to recreational cannabis as legalization spreads... Perhaps a lot of it will. Even if the recreational-cannabis market grows to rival those two industries, that is where the Prohibition comparison ends... But it begins to describe the potential market for cannabis.
Consider health and wellness... It is estimated that Americans will spend $88 billion on "nutraceuticals" by 2021. These are all the vitamins, lotions, creams, powders, and other products we take that aren't specifically medicine.
And speaking of medicine, people in the U.S. spent $360 billion in 2018 at their retail pharmacies... filling the pockets of drug companies and pharmacy benefit managers. Cannabis will take a part of this as well.
New 52-week highs (as of 6/13/19): Blackstone (BX), Teucrium Corn Fund (CORN), Disney (DIS), Equity Commonwealth (EQC), iShares iBoxx Investment Grade Corporate Bond Fund (LQD), Procter & Gamble (PG), Starbucks (SBUX), Under Armour (UAA), Vanguard Real Estate Fund (VNQ), and W.R. Berkley (WRB).
A busy day in the mailbag: Two readers share the best investing advice they've received... and several others weigh in on Steve Sjuggerud's China documentary, New Money. As always, send your notes to feedback@stansberryresearch.com.
"Automate your savings. Start by investing in fixed income for a long, long time and only buy common equity with that income. Pay for predictability. It's slow to start, teaches the much needed savings and patience skills, and is easy to grow infatuated with during market dislocation." – Paid-up subscriber Samuel A.
"The best piece of investing advice I've received was to use TradeStops. I bought a one-year subscription on the recommendation of someone at Stansberry (I don't remember who). After using the subscription for a few months I was convinced and bought a Lifetime subscription. My savings have far exceeded the cost of the Lifetime subscription." – Paid-up subscriber Ed M.
"Your movie was an enlightening experience, I had no idea of the progress that has been made in China. I still had visions of Rik-Shaw's, cone shaped hats and peasant clothing.
"I joined Steve's service after viewing the movie and listening to his presentation and have already purchased 3 of the stocks he recommended. I look for more guidance and recommendations and sincerely believe that as election time nears, we will see the end of the Trade war... then watch Steve's recommendations surge..." – Paid-up subscriber Paul M.
"Haven't seen New Money yet. Will try to do so soon. However, having seen TV news tonight of the demonstrations in Hong Kong and recalling Tienanmen [sp] Square some time ago, I think we need to look at all facets of China, both economic success and social distress. Or so it seems.
"Going all electric is a great boon for the environment but one needs to balance individual electric emission savings [busses, cars, trains, etc.] with the community need to provide electricity to run and/or charge up all the batteries involved. Maybe New Money covers this and I'll try to get to it. But the coal fired plants seem to still beat out all the alternative energy they produce with wind, solar and hydro. Haven't seen a LCA analysis on China's overall energy system but considering that during the Olympics that they hosted, the air quality was only moderated partially and on certain days they practically had to prevent any vehicles in the capital city. That was not progress only a few short years ago.
"It's good to see a country like China improve economically to the point that we now have our President using tariffs as a weapon to try to balance the situation. Maybe this will work out over the next few weeks and maybe not. As the President says, we'll have to see what happens.
"I'm a political independent so this isn't a party-based commentary but what I feel is a situation where we need better and stronger diplomacy and not a program run on tweets and twitts. The Belt and Road gambit by China has made their clients beholden to them with excessive loans and in some cases, high debt levels that some may never be able to repay in currency. How to repay then? By allowing military bases to be set up in ports, airfields, and the like. Perhaps we did some of this in the past.
"I think D.C. has spent too much time arguing about tariffs and not enough time looking at strategic issues. China's leader has a pleasant public smile but he leads a very aggressive country. How transparent are their accounting systems to investors in China's stocks so that we can actually believe the data? I have enough problems today believing our own employment and GDP numbers which seem to be revised every month. Let's see if my opinion changes post New Money..." – Paid-up subscriber Doc D.
"I truly believe every word Steve [says] about China. The reason why China is so far advanced implementing 'our' technology than we is simple: One Party System. Period, full stop. Without the cumbersome burden of justly reconciling diverse political opinions, you can get a lot done quickly.
"I am not a fan of our current president, with this one caveat: He is dead right about China. As a trading partner, they have been robbing us blind for decades while we have watched our industrial infrastructure die on the vine in exchange for $13 shovels and cheap pool toys at WalMart and Lowes. Admittedly this is as much our fault as theirs.
"Here are a few topics into which Steve may wish to delve: Tienneman Sq, South China Sea grab, USN Freedom of navigation patrols, Silk Road (or, 'cut off western supply chain initiative'), fading rights of Hong Kong residents, Hong Kong protesters being expatriated to Chinese mainland for trial, Kangaroo Courts, Dali Lama, Nepal, our mutual security treaty with Taiwan, Severe repression/oppression of ethnic minorities, and a government appointed Arch Bishop of the Catholic church." – Paid-up subscriber John C.
Steve Sjuggerud comment: John C. brings up some great points. Surely, I could have covered some of them in the movie. And surely, I am not condoning them.
But here's the thing: As an investor, you want to find the ONE THING that matters the most. In China, TWO trillion dollars are about to flow into stocks, due to two things that will never occur again in human history.
There are always hundreds of reasons not to make any investment. I could have tried to explain the pros and cons of each. I chose not to do that. Instead, I focused on what I think of as the overwhelming one big thing: China's dramatic change, and the two once-in-a-lifetime opportunities today.
If you're not yet seen New Money for yourself, I hope you'll check it out right here.
Regards,
Justin Brill and Corey McLaughlin
Baltimore, Maryland
June 14, 2019