Investors have pushed up Canopy’s stock price more than 850 per cent because they expect Canopy to be the Wal-Mart of cannabis. But they’ve also pushed up the stock because it’s considered a safe haven in a sea of chaos. Virtually every stock has gone up in the last ten years.
Investors trade their hard-earned savings for shares of a (hopefully) successful, well-managed business.
That’s what stocks represent – ownership interests in businesses. So investors are ultimately buying a share of a company’s net assets, profits, and free cash flow (i.e. the money available to pay out to shareholders).
But is that what the current stock market represents? Is that what Canopy’s $5.5 billion market cap represents? A well-managed business?
In 2006, Exxon Mobil reported $365 billion in revenue, profit of nearly $40 billion and free cash flow of $33.8 billion. At the time, the company had $6.6 billion in debt.
Ten years later, Exxon’s full-year 2016 revenue was $226 billion, net income was $7.8 billion, free cash flow was $5.9 billion and the company had a staggering debt of $28.9 billion.
Compared to its performance in 2006, Exxon’s 2016 revenue dropped nearly 40%, due to the decline in oil prices. Profits and free cash flow collapsed and debt skyrocketed.
So the stock price must have gone down during this period, right?
Nope. Exxon’s stock price at the end of 2006 was around $75. By the end of 2016, it was around $90, 20% higher.
And it’s not just Exxon.
General Electric reported $13.9 billion in free cash flow in 2006. Last year’s free cash flow was negative. The company’s net worth fell from $122 billion in 2006 to $77 billion in 2016.
So investors’ share of the free cash flow is essentially worthless, while their share of the net assets has also fallen dramatically.
Same deal with McDonald’s. Between 2006 and 2016, the fast food joint reported only a tiny increase in revenue. And in terms of bottom line, McDonalds 2016’s profit was about 30% higher than it was in 2006.
Meanwhile, Ronald McDonald’s debt soared from $8.4 billion to $25.8. And the company’s book value, according to its own financial statements, dropped from $15.8 billion to negative $2 billion.
So over ten years, McDonald’s saw a 30% increase in profits, but took on so much debt that they wiped out shareholders’ book value.
And yet the company’s stock price has tripled.
The same is true for IBM, Coca-Cola, Johnson & Johnson, and Canada’s Licensed Producers.
The fundamentals are either marginally better or worse. But they’ve taken on a lot of debt. Yet their stock prices keep rising.
Of course, shares of these businesses aren’t declining because central banks are constantly pumping money into the system.
Keeping interest rates artificially low, engaging in “quantitative easing,” and other monetary acts of terrorism have pushed up asset prices to record highs despite no enhancements in their fundamental values.
Investors pay far more than ever for their investments and only receive marginal value in return.
Still, Canopy CEO Bruce Linton thinks his company will be the source of all cannabis in Canada.
He probably doesn’t see the financial elephant in the room and is too close to make a rational call.
Simply, Canopy is an underperforming asset fetching top dollar. Investors act like buying that stock is making them wealthier.
It’s not.
The financial system is due for a correction since none of the issues from 2008/09 were properly addressed.