I write a lot each day. And if I ever find myself in a situation like Brendan Gleeson’s character in “The Banshees of Inisherin” — a fantastic movie I watched over the weekend — I’ll be in a lot of trouble…
Sometimes, it can be a challenge to find a topic. With the market chopping around and momentum negative, I’m not eager to deploy capital… nor write an article about — yawn — trailing stops.
But something did capture my attention in the first hour of trading on Monday. Shares of Altria Group Inc. (NYSE: MO) are bouncing around after the cigarette-maker and dividend aristocrat announced a $483 million capital loss on its investment in cannabis company Cronos Group Inc. (Nasdaq: CRON).
Back in 2019, Altria bought a 45% ownership stake in the Canadian cannabis producer. It also purchased a warrant that allows the company to exercise and purchase the stock at C$19 per common share.
CRON was under C$4 Monday morning. That’s an ugly loss — and for investors who bought into the cannabis craze, it’s another lesson about chasing the fad while fighting the Fed, as in the Federal Reserve.
That’s why I want to discuss how I approach investing when “the next big thing” comes along.
1 Chart Tells Us Everything
Cannabis was the hottest trading category in 2018…
Everyone was high on a wave of state legalizations for medicinal and recreational cannabis. There no stock was hotter than Tilray Brands Inc. (Nasdaq: TLRY).
Shares of TLRY are down 58% in 2022. But this gets even uglier when you pull it back to a five-year chart. From its peak, shares are off more than 95%.
Yet for all of the hype on cannabis, this $2 billion company lost $508 million in income last year. It’s unprofitable, and analysts are running away from it.
Cannabis has been a losing bet for many investors. But that’s not the only “fad” that went awry in 2022 as the market experienced a dramatic downturn thanks to the Fed’s rate hikes…
The metaverse, or Web3, has been a major trend that captured the imagination of investors. I’ve met no shortage of investors and experts who argue this is the next major investment trend that will catapult Americans into incredible wealth.
But the Roundhill Ball Metaverse ETF (NYSE: METV) — a basket of stocks that would benefit from the expansion of the metaverse — is down more than 50% in a year.
A lot of the companies in the space trade at high multiples with little to no profitability. Now is not the time to buy these stocks — especially since we’re in a negative momentum environment. A company like Roblox Corp. (NYSE: RBLX) — at the center of the metaverse — is down 73% this year. It’s not profitable.
While it’s OK to nibble and set up a more speculative sub-portfolio, it’s critical to keep the bets small. In an allocation model with rates high, I’d say no more than 10% of my portfolio should carry a venture capital approach of buying “moonshot” stocks.
Focus on the Stuff We Need
When building a portfolio of moonshot stocks with immense upside, investors should also understand the current state of the market.
We had five major negative momentum events in 2022, and I don’t think we’re out of the woods yet. It’s likely we’ll see more selling in the year ahead, particularly in risk assets.
That’s why we need to adjust our portfolios and our expectations. It’s important to avoid stocks that are unprofitable and trade at high multiples.
For example, in today’s environment, I wouldn’t buy any stock that trades at a price-to-sales or price-to-revenue level over 10, especially if it’s unprofitable. So I’m avoiding growth stocks like RBLX, CrowdStrike Holdings Inc. (Nasdaq: CRWD), Cloudflare Inc. (NYSE: NET), Lucid Group Inc. (Nasdaq: LCID) and Rivian Automotive Inc. (Nasdaq: RIVN).
That doesn’t mean I can’t trade them. When momentum goes positive, these stocks become short-squeeze candidates…
For investment purposes, however, I want to build my portfolio heading into 2023 around companies that have low multiples, great businesses, strong balance sheets and plenty of cash. I’m talking about a private equity approach to the market — and recognizing that 2023 might be volatile.
Focus on the companies that make things in the sectors I discussed last week — energy, food, real estate, commodities and medicine.
To your wealth,
P.S. And don’t forget to let me know if you have any feedback, questions about today’s issue or anything else. Just email us at email@example.com.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.