Righteous Common Cents for September 21, 2018

September 21, 2018, by John Norris

Way back in 2000, and I can’t believe it has been 18 years, the movie ‘Meet the Parents’ hit the screens. I thought it was a real laugh riot at the time, and still think certain scenes are hilarious. If you have seen the movie, you may remember the following exchange between Ben Stiller and Robert DeNiro. If you haven’t, it is a conversation in the car between a young man (Greg) trying to impress his soon-to-be finance’s father (Jack) who he is meeting for the first time. Here goes:

 

Greg: [about the song Puff the Magic Dragon on the radio] Great song.

Jack: Yeah, one of my favorites.

Greg: Who would’ve thought it wasn’t really about a dragon, huh?

Jack: What do you mean?

Greg: You know, the whole drug thing.

Jack: No, I don’t know. Why don’t you tell me?

Greg: Some people think that…to “puff the magic dragon” means to– They’re really, uh– to smoke– to smoke– a marijuana cigarette.

Jack: Well, Puff’s just the name of the boy’s magical dragon.

Greg: Right.

Jack: Are you a pothead, Focker?

Greg: No! No.

Jack: What?

Greg: No, no, no, no, Jack. No, I’m– I’m not– I– I pass on grass all the time. I mean, not all the time.

Jack: Yes or no, Greg?

Greg: No. Yes. No.

 

It is truly a funny scene. So much so, men (and it is always men who do such things) routinely quote the following line as they would any number of the gems in, say, ‘Caddyshack’ or even ‘Stripes’: “are you a pothead, Focker?”

Now, let me ask the following: are YOU a pothead? Well…are you?

Most of you could/would or can/will answer that question in the negative. Some number may or may not admit “one time when I was younger, but I didn’t inhale” or wonder if that, what could only be considered a, ‘contact buzz’ at the, I dunno, Rick James’ concert counts. However, when push comes to shove, most people who read economic newsletters probably don’t fire up terribly much, if at all.

So, I have been a little surprised with all the questions I have gotten about so-called pot stocks. Apparently, and according to at least one headline on Bloomberg, “Cannabis Is the New Crypto,” as in cryptocurrencies. It would seem marijuana, at least the medicinal kind, has become a favorite amongst speculators. So much so, my buddy Paul LaMonica at CNN Money wrote the following in a column yesterday:

 

“Canadian cannabis stock Tilray has, to put it mildly, been on a strange trip.

Tilray’s moves have been wackier than anything Harold and Kumar experienced on their trip to White Castle or Seth Rogen and James Franco’s adventures in “Pineapple Express.”

Shares of Tilray (TLRY) have shot up nearly 50% in the past week, surging nearly 40% alone on Wednesday — a day when the stock was halted five times in the final 70 minutes of trading on the Nasdaq for volatility.

The stock was up more than 90% at one point Wednesday and also dived into negative territory before recovering. Shares remained volatile Thursday, alternating between double-digit gains and sizable losses. It was down about 20% in midday trading.

But following the moves of the past week, Tilray’s market value is a staggering $16 billion. It is worth more than Molson Coors (TAP), Macy’s (M), Tiffany (TIF) and casino giants MGM (MGM) and Wynn (WYNN).

Not bad for a company that just went public in July, isn’t profitable and is only expected to generate sales of $41 million this year.”

 

Yeah, I think Paul had a good time writing that piece.

But consider that statement: “…Tilray’s market value is a staggering $16 billion. It is worth more than Molson Coors (TAP), Macy’s (M), Tiffany (TIF) and casino giants MGM (MGM) and Wynn (WYNN).” Closer to my home in Birmingham, some Canadian company which apparently produces medicinal marijuana has a larger market capitalization than Vulcan Materials.

You might ask: “what are investors smoking?” As if you didn’t already know, huh?

Let me give you this little caveat: I don’t personally own any so-called pot stocks either directly or indirectly. Our firm doesn’t make a market in any stock, let alone pot stocks, and doesn’t actively trade in any as either agent or principal. There you have it.

Here is the rub: investors don’t really believe some small medical marijuana company is going to organically grow (pun intended) into these recent valuations, ever. This is a short-term feeding frenzy with a big old hunk of ‘greater fool’ in the middle. Even so, the underlying thought process of the first folks on the bandwagon undoubtedly had something to do with buying a startup firm before some much larger pharmaceutical company gobbles them up at dot com levels…if not higher (again with the puns). Further, buy the Canadian company now AND just wait to see what happens when the FDA/DOJ open(s) the proverbial floodgates in the US.

Right? I suppose so.

Although there are folks who have undoubtedly done some calculations, who really knows the true potential size of the medical marijuana industry? Hmm? While I haven’t sharpened my pencil, I would venture a guess it isn’t going to anywhere near as large as people might currently think….at least the official industry. It won’t even be close.

In my opinion, the reason is pretty simple: by the time we get to that point, that being a flourishing legal medical marijuana industry in the US, our society will have become completely desensitized to and accepting of the whole subject. Heck, recent polls have shown as much as 64% of Americans favor legalization of all forms of the stuff. Perhaps we are already there.

In the not so distant future, while not every jurisdiction will have legalized pot in some form or fashion, most places will have probably decriminalized it to some degree. If this is in fact possible, if not probable, what is the likely outcome? I submit pharmaceutical companies will do what they want, but I imagine a lot of folks will be growing the stuff themselves. Why wouldn’t they? It is arguably better than oxycodone and all the other opioid pain killers flooding the streets, let alone cheaper.

No, this doesn’t mean anyone’s sick grandmother is going to morph into some Cheech & Chong-esque pothead. Phish and Panic shows aren’t going to spontaneously erupt in the town square. Jeff Spicoli isn’t going to run for President. We aren’t going to put Bob Marley on the $20 Bill and change the national anthem to ‘Sweet Leaf’ by Black Sabbath. No one is going to make you eat Doritos or wear tie-dyed clothing, that is if you don’t want to do so. I happen to like nacho cheese Doritos.

By the time the dust settles and the, ahem, smoke clears, I suspect the end result will be an overall societal acceptance of marijuana, period. Consumption might increase somewhat, but probably not as much as some folks fear. After all, how much impact does legalization really, really have on the demand curve? That is the real question…not necessarily supply. I suspect it is somewhat readily available if you travel in certain circles and college campuses. As for medicinal marijuana? As you can probable tell from my comments thus far, if that domino falls throughout the country, the recreational one will eventually as well.

In the end, like Greg in the movies, I am going to pass on grass AND grass stocks. Unless you want a long strange trip, my apologies to Jerry Garcia, I would recommend you probably should do so as well. As alternatives, maybe you should invest in companies that make greenhouses? If not that, perhaps a White Castle or Krystal’s franchise is in your investing future…dude.

 

Have a great weekend!

 

John Norris