We finished yesterday’s issue with the idea that the cannabis sector is the place to be right now, with regard to hunting fast moves on the stock market.
Some proof came via the big lift in Ecofibre shares yesterday. They finished the day up 25% after the release of the full year results.
The ‘good news’ around this is out now — and therefore in the price, as far as the short term goes.
But there’s also an important distinction to make about Ecofibre compared to some of the other cannabis names on the ASX.
It has revenue!
That might sound strange. You’d expect a company on the share market to have cash coming in the door.
But it’s not true for every business on the ASX — and certainly some of the cannabis names.
Several don’t generate revenue, let alone profit.
That’s why they came to the market — to raise funds to invest in research and development and clinical trials.
You need to know this if you’re considering any potential investments because it’s part of how you determine what risk you’re taking…
You might be surprised by the kind of return you can get in a stock that makes no money.
That’s because the stock market is always trying to price in the future profits to come, rather than what’s happening today.
Naturally, a stock with no revenue or earnings is a higher risk proposition than a company that makes money.
The key is to do some homework on a potential development in front of the stock to make investors bid it up.
I call these ‘catapult’ stocks.
‘Catapult’ stocks are companies that I believe could take off in price by 10-50% in a day — sometimes even higher — for one key reason…
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They make a big, positive market announcement, which the vast majority of investors don’t expect.
Imagine a profit upgrade…or a takeover offer…or a new deal with a famous client…
These types of announcements are among the few things that can send shares into lift-off mode, and fast.
You need to have your money positioned in the stock BEFORE the announcement happens.
Of course, we can never know exactly when this type of news could come.
So, what do you do?
We find companies that have great odds to release this type of news…make sure they’re growing businesses…and buy them.
It’s even better when you get more than one announcement.
I mentioned yesterday how the May recommendation for my Small Cap Alpha service has doubled in about a week.
Here’s what that looks like on the market…
It released three bullish announcements — all separate and on separate days.
The stock finished up 33% yesterday. That’s a good feeling in anyone’s book.
Of course, a gain is never yours until it’s in your pocket — never forget that. And certainly not every idea works out like this.
But you can see clearly the power of a change in expectations on the stock market. This works in both directions.
A rising outlook for a stock takes it up. A falling outlook takes it down.
That’s why it’s important to be highly sensitive — as much as you can — to what the market is currently pricing in around a business compared to its potential upside.
If we go full circle to the top of today’s email, we can see that Ecofibre has a very good business in a growing industry.
But experience says to me that most of this outlook is built heavily into the price right now.
That means buying today brings less upside in the next six months than you might find in another stock. It’s unlikely to double from here.
I could be wrong about that. For example, Ecofibre has multiple ‘wildcards’ from its experimental Hemp Black division.
It could generate a great announcement that brings new potential revenues.
But in general, I’m scoping out other cannabis names that have yet to lift in the same manner as Ecofibre.
(Just so you know, Ecofibre doubled quickly after listing in March. It looked expensive after that, but has shot up again over the last month.)
Why the cannabis sector is compelling
There is lots of potential for good announcements here.
I suspect we could see takeover offers, mergers and deals, too. That gives you, as a small-cap investor, multiple potential catalysts.
That’s a very good place to put your precious capital.
You could get a lift from growing revenues, deals or new markets opening up.
Any of these could lift the stock 10-50% in a day and — as you’ve seen — potentially higher in as little as a week.
Remember another thing: There’s a time to be aggressive in the stock market and a time to bring in your horns.
This style of aggressive investing didn’t really work in 2018 — the market sentiment just wasn’t there (for complicated reasons).
But it’s there now, so cash in while you can.
If you’d like to try this in action for real, go here now.