I’ve been turning numbers over for the past couple of days, running valuations and cost of capital on MSOs, partially prompted by a greasy sell-side-buzzword-filled-bingo of a write up. I’ve been trying to do what I do: look for breaks in share price versus asset pricing in sector. It’s the reason why I’ve bought what I’ve bought in the past year ($APHA/$FIRE/$GTEC/$HITI/$XLY). I’ve had a couple of mutts previously ($CANN/$JWC). I’ve also traded across a bunch of companies over time ($TER/$HVT/$TGIF/$GLH/$CMED/$WEED/$XXII etc. etc.) Right now? I own $WMD, and that’s all. More on that later.
Hey – normally I wouldn’t link to something like that sell side shlock above, but, it’s important to point out how the sell-side panders, and to know who the enemy of rational thought is. It’s just a sales cycle, and no more than a glossy pamphlet in an auto dealership. Share price can go up…. and that’s the allure: the promise of making money. Lately, I’ve seen retail opinions harden as MSOs trade largely flat, or some new patent getting touted as a ‘game changer’ as folks desperately cling to the sales pitch they’ve swallowed for explanation as to why they aren’t yacht shopping yet. Hey, prices can still go up. Or down. Or sideways. We can’t predict the future. But repeating sales pitches as ‘proof’ that markets are irrational or inefficient or whatever isn’t what an investor should be doing.
I even saw a person – normally pretty square – present $CRON’s trade volume versus MSO trade volumes as ‘proof’ that markets are inefficient right now. Really.
Interest rates (debt) are part of the cost of capital. So is equity. There’s a detailed and relatively simple model for the cost of capital, but that model is best understood as a guideline, not a precision instrument. There’s been attempts at improvements, particularly around times of ‘irrational’ markets. All the discussions are largely academic though – as markets are dynamic and based upon human behaviour. What held a year ago might not hold today. Dumbing down of the qualitative aspects of the cost of capital is what salespeople do, and when I impute a cost of capital, it’s referenced to a sector and the time and place it exists within. We’ve seen some large changes in the cost of debt/equity over the past couple of years – and it (will) continue to do so.
Anyhow, readers will know I like using opportunity cost to help value equity issued by a company. After all, if an outfit went to market with 100 shares to sell, or, gave those shares away to induce more favourable terms on a loan – it’s still a cost to the company in equity. In the former, they get cash. In the latter, presumably they’ll get cheaper interest rates (or perhaps it’s a cost for the deal to get done at all). Hybrid instruments (convertibles) hit both equity and debt. Free warrants (or optionality) hit equity.
I’m having a hell of a time finding anything remotely worth the price in market right now, nor anything that presents a risk/reward scenario that falls in an acceptable range for myself – which simply means there’s many speculative stocks out there, contingent on factors yet to happen.
While I’d love to find something, it’s important for anyone who trades that it’s as important to know when not to trade as it is when to open/exit positions.
GoBlue likes $GTII operationally (relatively speaking), as do I. Given regulatory risk, I just can’t see potential upside higher than potential downside at this point though: that’s the appropriate skew for a trader to take position on.
Back to Green Thumb’s ($GTII) 7% interest rate in a post later this morning. I’ll do a total costing of it, and present my calculation on the aggregate ‘reduction’ in cost of capital.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $GTII