January 2, 2018 and January 1, 2018

The market is off and running for 2018 with the S&P 500 rising 0.8% and Toronto rising 0.6% on this first trading day of the new year.

FedEx was up 3.2%.

CRH Medical was up 4.8% on Toronto to Canadian $3.47. This has been quite a volatile stock with a 52 week range of $1.82 to $12.35.

Penny stock Ceapro was up 10% to 55 cents and after the close announced the grant of 210,000 options (which vest over three years) at 50  cents. Also 210,000 Restricted Share Units. This quantity of options does not strike me as overly large. It gives management an incentive to do things that push the stock price up (like hopefully make money).

Cannabis / Marijuana stocks surged again today. This feels a bit like money for nothing. None of these stocks would look attractive based on earnings to date or their book value. Maybe the stock prices are justified based on earnings projections. But it appears that people keep pushing the price up based on momentum but also based on various announcements that indicate that there will indeed be sales.

It may be sour grapes on my part but I would offer the following thoughts:

A large market for any product is no guarantee of large profits for anyone let alone every company in the industry. Airlines always have many billions in revenue and yet often the industry is not very profitable and bankruptcies have been frequent in the past.

Will Cannabis be a commodity product? In that case expect only the lowest cost producers to make large profits.

Will Cannabis be a branded product where people pay more for their favorite brand? In that case, which brands will be the favorites?

What are the barriers to entry in the Cannabis business?

In the tobacco business, did the farmers make huge gains or was it companies higher up the food and brand chain that made the big money?

My guess, and it is only a guess, is that that these stocks could certainly go higher, perhaps far higher, but many of them may well finish the year lower than they are starting the year.

Aurora Cannabis has a market cap value of $5.4 billion and a price to book value ratio of 18 times. By way of comparison, Canadian Western Bank has a market cap value of $3.5 billion (which it slowly built up over about 30 years) and a price to book value ratio of 1.6. Maybe that is sensible. Maybe not.

Some of these companies have recently raised money but issuing shares. I think that is extremely wise and could guarantee the survival of the company. If any of these companies have any debt they should now issue shares to pay that off and to build a war chest while they can.

Many investors must be sitting on tens of thousands of dollars in gains on these shares. While they could go higher, it would seem to be prudent to lock in some of those gains.

Despite the large gains so far, I think it has to be admitted that investing in or holding these stocks is an exercise in gambling as opposed to investing. But again, this may all be sour grapes on my part.

January 1, 2018:

Here are a few predictions and thoughts about 2018:

It appears that barring geo-political risks, the U.S. economy will do well and Canada should do well also although NAFTA issues are a concern.

Stock markets may not do as well as the economy since a good deal of optimism about 2018 is already reflected in stock prices.

Interest rates will likely continue to increase (and all else equally, that is a negative for stocks).

Many stocks and a number of sectors or even possibly the market overall will have one or more periods where fear pushes their prices down materially. Those are the periods where having cash to invest at lower prices can be very advantageous.

Berkshire Hathaway’s book value per share growth will likely surpass the one million percent figure when the 2017 number is released (boosted by a huge gain on its deferred income tax liability). I don’t think Warren Buffett will view that incredible milestone as an appropriate time to cut back his duties or retire as CEO, but at 87 years old he just might. However, he really does not appear to have lost anything in terms of his abilities or energy and so he might be motivated to just keep on going unless a health issue emerges. If Berkshire does not announce a major acquisition of at least $25 billion, this should be the year that it finally introduces a dividend and/or buys back shares.

I have updated the composition of my own portfolio. I have a large 25% allocation to cash and a very concentrated equity portfolio. The P/E ratio of my equity portfolio is relatively low at 14.4 which, in theory, reduces my risk. I like the safety aspect of the 25% cash but at the same time this could reduce my return. I may redeploy some of my U.S. cash into global ETFs.

The performance of our stock picks in 2017 was good with the three stocks that were rated in the Strong Buy range as of the start of 2017 rising an average of 18%. The 22 stocks that were rated (lower) Buy or higher rose an average of 15.6%.

My own overall portfolio was up 15.2%.

Meanwhile, the Toronto Stock Exchange index was up just 6.0% but the S&P 500 was up 19.4% and the Dow Jones Industrial Average was up 25.1%.

Most analysts seem to be predicting another strong year for stocks in 2018. That remains to be seen. Stock indexes are unpredictable in the short-term.

For the start of the new year, I have removed several stocks where the report was well out of date.

Note see the menu to the right to click to see 2017 and earlier comments