Mister mojo risin’, mister mojo risin’
Got to keep on risin’
When looking for the best marijuana investments, I emphasize rising momentum, or mojo risin’, as Jim Morrison of The Doors sang in L.A. Woman.
I search for canna-businesses undergoing a significant change in their business models that will imminently propel earnings.
Momentum matters in marijuana investing. However, blindly buying momentum stocks is risky, like riding in an untested rocket. That’s why I pinpoint sound pot stocks that keep risk to a minimum and are most likely to take off.
All the marijuana stocks we recommend at Investing Daily are ready to launch based on new developments in their businesses. It might be a new product, a new major customer, or an acquisition that provides a key technology. Whatever the news is, it must be powerful enough to improve earnings for an extended period.
To see significant upside under this year’s conditions, companies in any sector will need to prove that they can balance revenue and profit growth with a plan on how to handle higher future costs. As inflation gets hotter and interest rates rise, soaring transportation, labor and debt servicing costs can be a “buzz kill” for marijuana companies and their investors.
That said, the benchmark Horizons Marijuana Life Sciences Index ETF (HMMJ) has kept pace year-to-date with the S&P 500, as the following chart shows (as of market close February 16):
I currently think that a comparison of the marijuana sector’s valuation metrics against its earnings growth potential points to a breakout on the upside for pot stocks in coming months.
Of course, analyzing individual stocks is a tricky business in the best of times. Equity analysts and portfolio managers must decide what valuation method is the best one to use for a stock. They must decide how far out into the future to estimate earnings, what period of time they expect to hold a stock, and the stock’s degree of riskiness.
Most analysts use earnings estimates as a starting point. They use these numbers as a home base for screening stocks and deciding which ones are worth more time and effort. Earnings estimates are compiled from various data feeds. The data provider for our team of analysts is FactSet.
The combination of hotter inflation and a lingering pandemic makes stock picking particularly treacherous right now. I’ve always dug deeper into earnings estimates to decipher the true source of earnings growth. In particular, I screen for stocks via the time-proven yardstick EBITDA.
EBITDA, that daunting acronym for earnings before interest, taxes, depreciation, and amortization, is a good marker for the cash earnings that a company can generate. It removes the noise of tax rates, interest payments, and non-cash charges. EBITDA isn’t perfect, but it’s a better metric than growth created by, say, a one-time tax windfall. It helps me separate the true “momentum triggers” from the smoke-and-mirrors.
Although marijuana is still an early stage industry, the fundamentals among many marijuana companies have improved to the point where metrics such as EBITDA can be used as a basis for comparison. Many pot companies are currently enjoying sufficient free cash flow to make their valuation more of a science than an art.
It’s a good sign if the marijuana stock is followed by a sizeable number of analysts on Wall Street. There’s an army of pseudo-analysts opining about stocks out there, especially about marijuana stocks on social media and message boards. Look for coverage by serious number-crunchers at credible research firms.
Marijuana stocks tend to get whipsawed by the rumor mill. Tune out the white noise by the amateurs and look for seasoned advice from the pros.
In fact, by applying rigorous stock-picking criteria, our team just pinpointed a marijuana stock that’s on the cusp of major money-making mojo. Click here for details.
John Persinos is the editorial director of Investing Daily.