Source: Joseph Cafariello, May 1 2014
California and Alaska had their gold rushes. Texas has its oil rush. Now Colorado has its weed rush. The legalization of recreational marijuana in the state of Colorado has sown the seeds of the first legitimate non-medicinal marijuana operations in the U.S., with grow ops sprouting all across the state.
In January alone, $14.02 million worth of recreational pot was sold by 59 businesses in Colorado, generating some $2.01 million in state tax revenue. It’s turning out to be quite the lucrative industry – for the state, anyway.
For many pot growing businesses, however, it’s quite the struggle. Though marijuana is one of the easiest crops to grow, entrepreneurs are finding out that growing a marijuana company is not nearly as simple, and that burning their cash does not produce as sweet an aroma as the burning of the pot itself.
Yet marijuana stocks keep getting bought up with enthusiasm, their price multiples drifting higher and higher into bubble territory. Not only are their valuations too high, but their investors must be too. Looking a little more closely at some financials, we find that experimenting with marijuana stocks could be causing hallucinations.
Weeding Out the Weeds
It is doubtless that the marijuana growing and vending industry will flourish in the not too distant future. But as with any new industry, the beginning is always rocky. The majority of the publicly traded marijuana companies and those that cater to them are experiencing growing pains, and are likely to do so for quite some time.
In the table I’ve assembled below, you can see how revenues from pot sales are dreadfully low and operating expenses are prohibitively high to justify their ridiculous valuations against other Micro Caps.
Several metrics noted above point to unsustainably high stock prices in the marijuana field:
• While micro-cap stocks from the hospitality, financial and energy sectors are generating the typical revenue-to-market-cap ratios you’d expect from a micro-cap – generally in the 50-150% range – marijuana-related stocks are posting revenues that are less than 1% of their market caps.
• Where a typical micro-cap stock trades at 1-3 times price-to-sales and price-to-book-value, pot stocks range from the low 20s to well over 1,000 times their sales, while price-to-book of 23 and 33 means their stocks are trading that many times more than their companies are actually worth.
• Where the average micro-cap has manageable operating expenses with positive or near-positive operating margins, pot companies’ operating margins reach thousands of percent in the negative! Such operating losses can only cause their capital to wither away, and fast.
As ugly as those figures are, the picture was even worse at the beginning of the year when Colorado legalized the sale of pot for recreational use, as noted in the graph below. We can see why investors have been drawn to the mostly penny stocks, since all it take is a little pop in price to multiply your investment 5 times over.
Article Source: http://www.wealthdaily.com/articles/marijuana-stock-guidelines/5146