This Once-Hyped Sector Could Be a Better 'Buy' Now

Wall Street analysts are undershooting – again... Almost everyone is 'beating estimates'... Thomas Carroll shares cannabis insights... This once-hyped sector could be a better 'buy' now... Taking some time off...

Last week, we told you this 'earnings season' would be bullish for stocks...

Mostly because the expectations of many Wall Street analysts have been lower than the results actually have been.

As our Stansberry NewsWire editor C. Scott Garliss recently detailed, institutional analysts have been undershooting reality for more than a year... projecting earnings from the top U.S. companies that have been off nearly 20 percentage points over the last five quarters.

Often we talk about companies having "earnings misses," but lately it's the analysts who should be on the hook for predicting growth numbers that have been way off...

As we reported last week, when we say "Wall Street analysts," we're using a broad-brush label for the folks who predict earnings expectations for various stocks and sectors. Some are better than others... and have different approaches and expertise.

But on balance, last quarter they were off by an astonishing 25%. That's why you saw all those "beating estimates" headlines... which in turn serve as positive sentiment for these stocks.

This quarter, it looks like more of the same...

Look at the first week of the heart of the earnings-reporting season for the third quarter of 2021. Companies in the S&P 500 Index that have reported their latest numbers have beaten Wall Street expectations by 16%... and 82% of the companies have beaten estimates, according to FactSet.

Last week, a handful of financial institutions – like Bank of America (BAC), JPMorgan Chase (JPM), and Morgan Stanley (MS) – all "beat estimates," and Bank of New York Mellon (BK) did the same on Tuesday.

In the meantime, the S&P 500 is up about 4% in a week... and is a minuscule decimal point from another all-time high, having fully recovered from September's sell-off.

What's more, only 20% of S&P 500 companies have reported data so far... leaving plenty of room for more to "beat estimates" in the weeks ahead. If so, this quarter's outperformance will probably look much stronger when all companies have reported in a few weeks.

Generally speaking, as Scott explained last week, a string of companies outperforming Wall Street estimates is bullish for U.S. stocks. That makes intuitive sense, of course, but very often it's not a result occurring for the straightforward reason you might think.

It's more because the bar has been so low to begin with...

And this is behavior that Scott says dates back to the financial crisis.

Back then, Wall Street analysts overestimated reality... They predicted that companies would perform better than they eventually did. When COVID-19 – the next big crisis – struck, this same group of analysts got more cautious.

We haven't seen many other market observers – and certainly not the analysts themselves – point out the dynamic at play that Scott, who spent 20 years working for some of Wall Street's biggest firms, does...

If companies become more constructive on their earnings outlooks, suddenly analysts will need to rethink their estimates. If earnings estimates are too low, that suddenly makes multiples of stock indexes cheaper.

And as they become cheaper, stocks grow more attractive in the eyes of investors. That sets off a whole new wave of buying activity, pushing indexes even higher. It's scary when you consider that institutional investors have been raising cash.

And we said last week why this matters. It's because institutional investors account for more than 85% of the volume of U.S. stocks. What they think and how they act can have an outsized influence on prices.

So when you see all those "beating expectations" headlines, remember who is setting the expectations to begin with.

Switching gears, our Thomas Carroll has his 'boots on the ground' this week...

Tom, editor of our Cannabis Capitalist newsletter, is in Las Vegas at MJBizCon, the largest cannabis industry trade show in the world. The event started Tuesday and runs through tomorrow.

Tom is meeting with many folks in the cannabis industry and taking in various presentations. He believes that the conference itself – being held in person for the first time in two years – could be a catalyst for cannabis stocks in general.

As Tom pointed out in the October issue of Cannabis Capitalist, the sector has taken a hit because of slower-than-expected progress on federal legalization legislation. Expectations were high after the November 2020 elections and there was talk of material laws passing soon.

As Tom wrote...

The cannabis sector peaked in mid-February following the "cannabis election trade." Since then, investors have engaged in consistent profit-taking – despite spectacular revenue and earnings gains across the entire sector for the first and second quarters of the year.

But, in Tom's opinion, this has led to a buying opportunity...

The once-hyped cannabis sector is cheap today...

It is trading at a price-to-sales (P/S) ratio of 3.7. That's the lowest it has been since 2019, outside of the bottom of the COVID lows 18 months ago.

And this P/S ratio – which is a good gauge of how "expensive" a stock is – is roughly three times lower than its most recent peak in February of this year...

Congress has been bogged down, of course, with other legislative items like the federal budget, the proposed infrastructure bill, and the debt-ceiling debate. Meanwhile, states are pushing forward, the industry has matured, and sales are growing.

But Tom says the buzz at the conference is that passage of the SAFE Banking Act – which would make it easier for cannabis businesses to, well, do business through the banking system – could still happen by the mid-term elections in 2022...

Commentary from the conference suggests the SAFE Banking Act will include commercial banking services, access to U.S. capital markets (perhaps U.S. listing), and some social justice measures. But mid-term timing is the biggest issue.

The SAFE Banking Act passed the House – for the fifth time – in September but faces a challenge in the Senate, where some Democrats are eyeing more comprehensive cannabis legislation.

Rather quietly, the cannabis industry continues to grow despite federal regulations...

As Scott reported in the NewsWire on Tuesday, cannabis industry sales hit a new record in 2020. Legal sales totaled $17.5 billion, a 46% jump versus 2019, and the outlook for the industry is strong...

Ten new states are expected to start selling cannabis between this year and next. According to a report by cannabis-market research firm New Frontier Data, 43% of the adult U.S. population live in marijuana-friendly states.

And by 2025, it expects that 2.4% of domestic adults will be registered medical-marijuana consumers and that total sales will hit $43 billion. As Scott wrote...

So, based on those expectations, the current forward-looking price-to-sales multiple of 3.7 times starts to look even cheaper. And if Congress can come to an agreement on the legalization and regulation process, sales potential could increase quickly.

That's good news for long-term investors looking to buy something that's not so expensive right now... That's hard to find these days, but this is an example. As Tom says...

The cannabis sector is giving us another great opportunity to start new positions, repurchase those sold for profit, or lower your cost basis on long-term positions.

For more, be sure to check out our Cannabis Capitalist newsletter. If you don't have a subscription already, you can find more information here... And Alliance members can access all of Tom's research as part of your partnership here.

In the September issue, Tom laid out his favorite five stocks in the industry... and says that these are a great jumping-off point if you're just getting started in the space.

One more thing before we go today...

Today is the last day I (Corey McLaughlin) will write to you all for a while...

My wife is due to go into labor with our second child any moment now, and I will be taking some extended time off after that happens.

Not long ago ‒ and in many cases still ‒ many fathers weren't expected to be around for the birth of a child. Or if they were, dad went back to work shortly thereafter.

Today, I'm fortunate that Stansberry Research offers a generous paid-leave policy for parents of infants... and I want to be around to help and to see the kid coo and start to grow, so I'm taking the time to do so.

I'll be back, but it will be closer to the end of the year...

Not to get too sappy, but I'm incredibly thankful for the opportunity to take leave...

Our founder Porter Stansberry, partners Steve Sjuggerud and Dr. David "Doc" Eifrig, and the others involved in our business today and over the past two decades have built a great company... and I've learned a ton about the markets – and life – by working here.

In the meantime, the Digest is in good hands, of course...

Unlike me, the crazy world that gives us plenty to write about is not going away... so you can expect your daily edition in your inbox as usual.

While I'm probably changing diapers, cleaning milk bottles, and generally trying to figure out how to manage two children, you'll hear more about the economy and markets in this space from regular contributors Dan Ferris and Kim Iskyan, as well as Scott and the hard-working analysts on our Stansberry NewsWire team and Stansberry Research staff.

I want to thank all of them in advance for stepping in while I'm out... and especially to senior managing editor Dean Jones Jr. for keeping things rolling.

You won't miss a beat on what's going on in our universe of research starting next week, when Dean and Kim will report live – in person! – from our annual Stansberry Conference at the Wynn in Las Vegas.

We've also teed up several guest essays from our editors, and at least one special interview that I know you'll find valuable as well.

The only thing I'm regretting right now is the timing of this, professionally speaking...

I'm going to miss out on a trip to Vegas – and the chance to see and hear a lineup of brilliant speakers... and catch up with colleagues I mostly haven't seen in person since our last editors' conference in early March 2020 in Florida.

Oh well. Maybe I'll sneak a look at the livestream between feedings while watching where bitcoin's price goes next. (A guilty pleasure.) I don't like to offer predictions... but I'm willing to make a risk-managed bet that bitcoin is selling over $100,000 by the time I'm back. Talk to you then.

Our Biggest Event of the Year Is Almost Here

Our annual Stansberry Conference in Las Vegas is fast approaching...

Like everything else in the world, the COVID-19 pandemic forced us to "go virtual" in 2020.

Fortunately, this year, we're returning to an in-person gathering at the luxurious Encore at Wynn Las Vegas... The event will begin on Monday, October 25.

As longtime subscribers know, the Stansberry Conference is a gathering of some of the brightest minds in financial research and beyond...

During this year's event, you'll hear from your favorite Stansberry Research editors – like Steve Sjuggerud, Dan Ferris, and Dave Lashmet. And of course, we also welcome special guests from outside our business as well. This year, our all-star lineup includes...

• Mohamed A. El-Erian: He's the chief economic adviser at Allianz and former CEO of PIMCO. Money magazine calls him "one of the smartest investors on the planet." And he was named in Foreign Policy magazine's list of Top 100 Global Thinkers for four years in a row.

• John Tamny: He's the editor of RealClearMarkets, a spinoff of the policy website RealClearPolitics. Tamny also wrote The End of Work, which shows the amazing evolution of jobs. He believes the "end of work" is near. In other words, you won't want to miss his talk.

• Jaime Rogozinski: You might recognize him as the founder of WallStreetBets, an online community that has tried to take down the world's top hedge funds. The story was featured on MarketWatch, Bloomberg, CNBC, and everywhere else in the financial media. But you won't believe what he has planned next.

We know a lot of folks are simply too busy to travel all the way to Las Vegas to join us. That's OK... With an online All Access Pass, you can still be "in the room" for everything.

For a small fraction of the cost of an in-person ticket, you can watch the entire conference live from the comfort of your own living room or office. Plus, everyone who claims an online All Access Pass today will receive a bonus gift valued at $500. Get started right here.

Think Like You're Wealthy

With U.S. stock growth slowing down and inflation running high on Main Street, in order to protect your wealth, you need to think like you're wealthy, according to author and mining industry veteran E.B. Tucker.

What does that mean? Tucker, author of Why Gold, Why Now? and a former Stansberry Research analyst, explains to our editor-at-large Daniela Cambone...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 10/20/21): Asana (ASAN), American Express (AXP), AutoZone (AZO), Brown & Brown (BRO), CBRE Group (CBRE), Cameco (CCJ), Costco Wholesale (COST), CoStar (CSGP), Denison Mines (DNN), iShares MSCI Singapore Fund (EWS), Formula One Group (FWONA), Home Depot (HD), JPMorgan Chase (JPM), SPDR S&P Regional Banking Fund (KRE), Markel (MKL), Mosaic (MOS), Northrop Grumman (NOC), OptimizeRx (OPRX), Ryder System (R), Royal Dutch Shell (RDS-B), VanEck Vectors Russia Fund (RSX), United Rentals (URI), United States Commodity Index Fund (USCI), ProShares Ultra Financials Fund (UYG), and Waste Management (WM).

In today's mailbag, a few subscribers wrote in who missed our new senior analyst Matt McCall's event yesterday afternoon. If you're one of them, good news... You can catch the replay here. It includes everything from yesterday, including the free stock pick that Matt gave away... a small company that he thinks can grow 100X in the decade ahead.

All the best,

Corey McLaughlin
Baltimore, Maryland
October 21, 2021