How to Cash in on California’s Cannabis Explosion
An event of historic proportions just transpired in California’s marijuana markets, and the amount of wealth expected to flow into this industry is record-breaking. On January 1, California completely legalized cannabis for medical and recreational use – promising to spark a $20.2 BILLION industry in the Golden State alone.
If you’ve been paying attention to the tech sector, you know that it has been the highest-performing sector in the stock market so far this year. While certain segments – semiconductors and telecommunications stocks, for example – have lagged, the sector at large has defied the broad market’s activity. While the sector hit a short-term peak in late January like all stocks did, it actually dropped less than every major market index; and while the S&P 500 and the Dow Jones Industrial Average have both been constrained by resistance at that January high, tech stocks have forged ahead, hitting new all-time highs and sustaining the upward trend the sector has been following now for more than nine years.
A lot has been said, and is continuing to be said, about the next big tech wave: the Internet of Things (IoT). The interconnectivity of devices – not just computers and smart phones any longer, but of practically every kind imaginable – presents incredible challenges, and opportunities to consumers as well as to the companies that will make it all possible. Companies in practically every industry in the tech sector – networking, semiconductors, software, telecommunications, and so on – are all in trying to build the 5G infrastructure that will facilitate the bandwidth necessary to make the Internet of Things a reality. Smart investors are the ones that are paying attention to those stocks and know how to take advantage of those opportunities in the right way.
The thing to keep in mind, however, that not every IoT-involved stock is the same. The truth is that while there are a lot of small, cutting-edge companies that are likely to make big contributions in this area, it’s also safe to say that what the Internet of Things is really going to look like is going to be driven, and defined in large measure by the largest and richest companies in the tech sector. These are the companies who have managed to extend and diversify their businesses into a lot of different technological aspects. It’s easy, for example, to think of Cisco Systems (CSCO) as a networking giant, because their hardware has been synonymous with the very infrastructure of the Internet since the beginning; but over the years they have diversified their business well beyond just routers and switches and have also built a large and prosperous software and services segment. Microsoft (MSFT) isn’t just about Windows, and Alphabet (GOOGL) isn’t just about search engines. All of these companies have expanded their scope and reach, which has also helped them develop and accumulate the resources that will help them continue to stay at the forefront of the “next big thing.”
That doesn’t mean that the smart way to get in front of the IoT wave, however is to simply start buying the biggest companies and hang on for the ride. The simple fact that tech stocks, and the broad market has been following such a strong upward trend for such a long time means that at some point, things are going to have to cycle back down; and given the length of our current bull market, that should be expected to come sooner than later. That means that most of the stocks that have been enjoying the longest, strongest runs for the last several years are really the riskiest stocks for investors to look at for new investments. And while a broad downturn could well affect all stocks to push prices lower, it also implies that paying attention to stocks that might be beaten down right now, but whose fundamental strength implies the business is worth more than the stock price currently reflects are the smarter way to go in the long run.
One of the simplest ways that a lot of value-oriented investors like to try to measure how much a stock should be worth – what I like to call its intrinsic value – is by using its Book Value. Warren Buffett likes to think of Book Value as what shareholders would be left with if a company decided to cease business operations, pay off its debts, and close its doors today. Most value investors prefer to see Price/Book ratios as close to 1 as possible, or even below when possible as the strongest indication of a stock’s bargain potential. I like to factor in the reality that all stocks tend to trade at multiples of their Book Value, so I compare a stock’s current Price/Book ratio to its historical average to hopefully provide an educated estimate of how undervalued or overvalued a stock may be at any given time.
In the spirit of trying to find good opportunities in the tech space to get in front of the IoT wave, the stocks that follow reflect a straightforward evaluation of their current price compared to their Book Value. I’ve identified what I think are four of the biggest, and best-known tech stocks in the world that are also certain to be major players in the IoT space, but that in pairs exist on opposite ends of the value spectrum.
Keep in mind that this list is based only on the stock’s price versus Book Value; it does not include any other fundamental, qualitative or technical evaluation. Before you make any decisions about the stocks listed here, you should make sure to do you own due diligence to decide if the stock fits your investing needs and preferences.
It’s interesting that two of the biggest potential bargains in the tech industry right now are telecommunications stocks. This is the most depressed industry in the entire sector, so it isn’t particularly surprising; but taken in the context of 5G and IoT, it could also be auspicious; the stocks below are, not surprisingly among the biggest owners of 5G spectrum leases in country and have also made some of the earliest and biggest strides in 5G infrastructure buildout.
AT&T Inc. (T)
Current Price: $32.68
T has a Book Value of $29.99 per share, which means that the stock is trading at a Price/Book ratio of just 1.08 right now. Its historical average, however is 1.94, which means the stock is trading at a significant discount right now. That’s not particularly surprising, given that the stock is down about 12% for the year. How big is the opportunity in the long term? The stock would have to move above $58 per share to arrive at par with its historical average Price/Book ratio. That’s a potential increase of more than 72% from the stock’s current price.
Verizon Communications (VZ)
Current Price: $54.14
VZ has a Book Value that is quite a bit less than that of T, at $12.98 per share, which means its Price/Book ratio is higher, at 4.17. That might seem high, but this is also where the historical average becomes useful, because it gives you a way to factor in the way the market at large tends to perceive that stock. VZ’s historical Price/Book ratio is 9.76, more than double the stock’s current Book Value. That means that the stock would have to increase to more than $126 per share to reach par with its historical average.
While telecomm stocks tend to dominate the value argument in the tech sector, it’s a couple of the biggest and most-respected names in the entire tech industry that are among the most overvalued right now. That doesn’t mean there isn’t a lot of opportunity for these companies in the IoT space; but it does mean that buying shares of these stocks could be dangerous at these price levels. Remember that because of the diversified nature of these businesses, there are a number of factors that are going to impact their stock prices far more than IoT alone. The fact that these stocks are highly overvalued means that I believe their risk is far more elevated than what you might have to deal with by focusing on undervalued stocks.
Cisco Systems Inc. (CSCO)
Current Price: $45.99
CSCI has a current Book Value of just $8.97 per share, which means that its Price/Book ratio is 5.12. On the other hand, its historical average Price/Book ratio is just 2.42 – less than half of its current level. That means the stock would have to drop to just $21.70 to arrive at par with its historical average. No matter how strong the company’s other fundamentals might be right now, or what its positioning in the 5G and IoT space is now or will be down the road, this is a significantly overvalued stock, with downside risk to your investing capital of more than 52%.
Microsoft Corporation (MSFT)
Current Price: $107.06
Microsoft might be one of the most dominant companies in the tech industry, with a commanding presence in PC’s, game consoles, and even in cloud services and storage; but they are also massively overvalued. MSFT’s Book Value is just $10.74, putting its Price/Book ratio at 9.96 right now compared to a historical average of 5.58. It’s not quite as overvalued as CSCO, but since the stock would have drop about 44%, to a value a little below $60 per share, it has to occupy the same perch with CSCO as a very risky investment to make right now.