EDITOR: | December 13th, 2016

What cannabis and social media stocks have in common.

| December 13, 2016 | No Comments

I believe that cannabis stocks, especially those of Canadian licensed producers will endure because people value them for reasons that draw on fundamental wants. There is distortion between their price and their value.

Price, as Warren Buffet said, is what you pay, value is what you get.

The stratospheric rise of cannabis stocks has defied traditional investment wisdom similarly to the rise of social media stocks. The similarity among these stocks compels us to rethink the way we evaluate cannabis securities.

Last week, Canopy Growth Corporation (TSX: CGC; market cap $1.08 B; P/E: 0.000) and Aphria (TSXV: APH; market cap $509M; P/E: 208.11) closed at $9.89 and $5.03, respectively.

One would think that cannabis stocks are worth less than their price.

Yet on December 1, Canopy Growth Corporation acquired Canadian ACMPR licensed producer Mettrum Health Corp for $430 M, which put a remarkable 30% premium on the stock in a single morning to bridge the gap between Mettrum’s contemporaneous stock price and its value as per the transaction with Canopy Growth.

When price-earnings P/E ratios lose their relevancy markets are about as confusing as a 1999 New Year’s party with fireworks, champagne fountains, and the expectation that the electrical grid is about to crash. It was erroneous to label the social media phenomenon a bubble that will eventually fizzle out like the US real estate market or the dot.com bubble.

That is exactly what we thought when in 2014 we covered social media stocks, wondering when the bubble would explode. We thought there is something unusual about social media that is grabbing our collective consciousness and departs from the traditional trends of bubble-and-burst cycles. Facebook (P/E 98.3), LinkedIn (P/E 915.86), Pandora (P/E 0.00), Twitter (P/E 0.00), Yelp (P/E 0.00). These stocks were trading at P/E ratios that would turn Exxon Mobil (P/E 12.29), Apple (P/E 12.89), and General Electric (P/E 16.94) into mythical creatures cavorting with pink unicorns.

At one point in its history Facebook traded at a P/E ratio of 2000. But since then these stocks have trended up. The P/E ratios have improved for some social media stocks but still defy conventional wisdom.

In science when a theory fails to accurately represent reality, scientists rewrite the theories. Such should be the case for cannabis stocks and social media stocks, which address such fundamental needs that they deserve different treatments from other stocks.

Social media stocks address our inherent need for socialization. Physical constraints have restricted social evolution ever since our ancestors descended from trees in the savannahs of Africa. It’s hard for two individuals to socialize when they are ten miles apart, separated by a river full of crocodiles, with no means of communication. Without socialization they will not form a clan (an important concept in anthropology), learn from each other’s experiments with coconut smashing, plan the invention of the wheel, dream up pornography, and giggle at flatulent outbursts.

Recreational cannabis, like social media, touches on the fundamental needs of humans to escape reality. It falls in the same category as alcohol, gaming, movie going, and recreational fornication. After over a hundred years of prohibition and indoctrination that delved into racism and pseudoscience people see the legalization of cannabis as a breakaway from a historical period when governments thought they could tell people what to eat, what to drink and what they can do in their bedrooms.

Dr. Luc Duchesne


Dr. Luc C. Duchesne is a Speaker and Author with a PhD in Biochemistry. With three decades of scientific and business experience, he has published ... <Read more about Dr. Luc Duchesne>

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