Yesterday, we began a special two-part series from Matt McCall, editor of . In Saturday’s essay, Matt discussed how getting in early and waiting for a stock to make the jump to a big, mainstream stock exchange can mean thousands of percent in gains. When you invest this way, it’s almost like you’re getting in at pre-IPO prices, and that can make a huge difference in your long-term returns.
Today, we pick back up with the series, looking at how Matt identifies those small stocks that might be making an exchange jump. Matt has a strict vetting process, and only a handful of stocks make the cut.
In today’s essay, Matt also walks readers through reasons why federal marijuana legalization in the U.S. might be just around the corner — and what that could mean for these “pre-IPO” investments.
I’ll let Matt take it from here.
Enjoy.
Jeff Remsburg
Benefits of Jumping to a Major Exchange
Yesterday, we looked at the power of getting into a great stock early –before it jumps exchanges. When you have your money invested before a move like that, it’s almost like you’re getting in at pre-IPO prices — which can be huge for your returns.
We left off yesterday looking at the specific type of companies that make good candidates to jump exchanges. You see, not all stocks make for good “pre-IPO” investments. You have to be very selective.
Now, before we get into what I look for in a Jumper Stock, why would a company even want to jump?
While U.S law has made life difficult for marijuana companies, there are U.S.-based ancillary businesses that have been able to jump to the major exchanges and bask in the benefits. Ancillary companies are those in the marijuana industry that don’t actually touch the plant. And more importantly, are not breaking any state or federal laws.
One example is Innovative Industrial Properties, a name that will be familiar to my Investment Opportunities members. This real estate investment trust (REIT) works solely with U.S. marijuana companies and owns properties where marijuana is grown. Since the company itself doesn’t touch marijuana, it is not breaking any federal laws.
It went public on the NASDAQ in December 2016, opening at $20.25 a share. In early 2019, it traded over $90 a share. For many Wall Street institutions and mutual funds, Innovative Industrial Properties was the only option to invest in a company that was profiting from the marijuana boom in the United States.
Not only is Innovative Industrial Properties an example of a marijuana company uplisting to a major stock exchange, it spotlights yet another huge opportunity. On February 14, the company announced it was chosen as a new member of the S&P 600 Small-Cap Index.
This was also a big deal. Innovative Industrial Properties became the first marijuana-related company to be included in one of the most prestigious indices in the world. The addition to the small-cap index requires all ETFs and mutual funds that track the S&P 600 to buy the stock. Innovative Industrial Properties jumped 7% the day after the announcement.
The index addition is one of many benefits of trading on the NYSE or NASDAQ. Here are four more reasons why marijuana stocks strive to list on a major stock exchange.
Benefit #1: Big Money
Nearly every mutual fund, ETF, and big institutional investment advisor is prohibited from buying stocks that do not trade on the NYSE or NASDAQ. After jumping to a major exchange, the stock can be purchased by the largest funds in the world. To give you an idea of how important it is to have access to mutual funds, look at how big the industry is today.
There is currently about $19 trillion in mutual funds in the United States … and another $3.6 trillion in ETFs. If the marijuana industry is able to eventually attract just 0.1% (one-one thousandth) of all assets in the mutual fund and ETF industry, it would equal an inflow of $22.6 billion. Money from large institutional funds, pension funds, and the like will also add to the inflow of cash into marijuana stocks listed on the NYSE and NASDAQ.
Benefit #2: Analyst Coverage
With money from large financial institutions comes the initiation of coverage by the big investment banks. One of the reasons we invest in smaller, early-stage companies is that they are typically flying under Wall Street’s radar. The number of analysts that cover these stocks is often very low — sometimes not even one firm provides research on the stock.
This is the case with nearly all OTC stocks. There are now a couple of firms that have created a business of covering smaller marijuana stocks, but it is nothing compared to a typical NYSE or NASDAQ stock.
A byproduct of more analyst coverage is increased press. When a new investment firm initiates coverage of a stock, it puts out a press release. That leads to more media attention and competitors also launching coverage of the Jumper Stock, which in turn sparks more buying. Wall Street is famous for keeping up with the Joneses — which in turn sparks more buying.
Benefit #3: Instant Credibility
When a Jumper Stock begins trading side by side with the biggest companies in the world, it immediately obtains a certain clout. It has joined the likes of Amazon and Apple — the big boys. It’s hard to put specific numbers on credibility, but the effect is clear. The Jumper Stock is now behind the red velvet rope, making it more credible to investors at is rubs elbows with the who’s who in business.
Benefit #4: More Regulations
It is rare to hear me say that more regulations are a good thing, but the stringent requirements to uplist to the NYSE and NASDAQ are actually a positive for Jumper Stocks. Investors of all sizes know that the stocks have met certain criteria, and that gives them more confidence in their investment.
To list on the NYSE, a company must have:
• A valuation of at least $100 million
• A minimum share price of $4
• Monthly trading volume of at least 100,000 shares
• At least 1.1 million shares that are publicly held.
There are also financial minimums that must be met as well as corporate governance practices. Meeting those requirements provides validity to a business, so executives of an OTC company have plenty of incentive to reach them.
The Jumper Stock System: Our Criteria
You can see why I want us to take full advantage of Jumper Stocks for as long as we can. At the same time, not every stock that uplists is an automatic buy. I’ve spent a lot of time over the past year developing a Jumper Stock System to help us identify which stocks are most likely to uplist and whether they are good investments.
A stock must meet at least three criteria before I even consider it for our Jumper Stock portfolio.
Criteria #1: Volume
Volume measures the number of shares that trade hands in any given period. A stock’s volume tells a very detailed story. The daily volume is the most widely used reading, but it does not tell the full story.
The volume trend is much more important. You can see this by analyzing average volume over the last 50 trading days. If the trend line is increasing, more investors are trading the stock. The opposite is also true.
Even though most stocks with the potential to jump to a major exchange are still flying under the radar, we must see increased interest over a period of time. To qualify for the Jumper Stock portfolio, volume must show a consistent increase over time.
Criteria #2: Size
The second criterion is a little more straightforward. The company’s market capitalization must be at least $250 million.
We calculate a stock’s market cap by multiplying the number of shares outstanding by the price per share. The result is the value of the company. For example, when the media began calling Apple the first $1 trillion company last year, it wasn’t referring to the stock’s share price. The $1 trillion valuation was Apple’s market cap.
Each of the major U.S. stock exchanges has its own requirements as well. To jump to the NYSE, a company must have a minimum market cap of $100 million. The NASDAQ’s minimum is $160 million. Most companies will wait until their valuations are above both before considering a jump.
You may have noticed that our size requirement is more stringent than the exchanges. That’s because companies with market caps under $250 million probably won’t be able to meet the other financial requirements of the NYSE and NASDAQ. So, while a small company could attempt to uplist once it has hit the minimum, it may not be successful for some time.
My studies showed that uplisting prior to hitting a $250 million valuation is rare. By keeping our requirement higher, it’s more likely that our stocks will make the jump within the next three to nine months.
Criteria #3: Sales
It is common for small stocks trading on the OTC to lose money. That’s not necessarily a reason for concern. These companies are focused on growing their businesses, and that often entails investing in expansion. That’s why profits are not a requirement of a potential Jumper Stock.
But while it is okay to see early-stage growth companies lose money, it is imperative that the company is growing sales. Above-average spending should generate higher sales. A company that is investing in its business but not increasing sales is failing.
Bonus Criteria: Intangibles
The dictionary definition of an intangible is “an abstract quality or attribute.”
Leadership is one of the most important intangible assets of a company. It is hard to quantify, yet it is a big determinant of a company’s success. It’s even more important for our Jumper Stock System.
In order for a stock to join the “big leagues,” it must have management that can take the company to the next level. Great small companies are led by great leaders.
I thoroughly research management for every company I recommend, but it’s especially important for Jumper Stocks. Do they have past success stories? Do they think outside the box? Do they have the drive necessary to take the company to the next level? Exceptional leadership is an intangible that all successful Jumper Stocks must have.
Another intangible I look for is a strong underlying story. Every company has a story about how it got to where it is today. Every company also has stories about where it will be in the future. This second story is built around two things: company specifics and the overall investment trend.
I am a big believer in a top-down investment approach. I look for big long-term investment themes that have the ability to grow by at least 10X in the next decade. Marijuana is clearly one such theme. Within the marijuana industry are several sub-industries. They range from the growers to retailers to brands to cannabidiol (CBD) to ancillary plays.
Before a stock is eligible for our portfolio, I analyze every aspect of the company’s business and story to make sure it has the kind of growth potential we are looking for in the years ahead. Jumper Stocks must have compelling past and future stories.
These are the main things I look for in potential Jumper Stocks. A stock that possesses all four is one we can bet will bring us impressive rewards over the long term.
Jumping for Joy
In any booming early-stage industry, there will be multiple opportunities to make enormous gains. But the only way to achieve life-changing profits is by getting in early.
The Jumper Stock System is based on getting in before the masses — and especially Wall Street. You will have first-mover advantage. Even if big Wall Street firms know a lot about a marijuana stock, you will be able to buy before the “big money” — think of it as investing “pre-IPO,” so to speak. It can be that powerful.
Why Marijuana Could Be Legal Soon
Let’s talk about another HUGE reason you want to be invested now — legalization could be right around the corner.
Marijuana legalization has been spreading across the country at a blistering pace …
Yet there has always been a major roadblock keeping the marijuana industry from reaching maximum potential.
Of course, I’m talking about the fact that marijuana — both medical and recreational — remains illegal on the federal level.
But all that may change soon.
According to recently “leaked” information by a former Republican congressman, the Trump administration could be gearing up to end the 70-year-long federal prohibition on marijuana. And … it’s expected to happen much earlier than most people anticipated.
A former GOP lawmaker, Republican Dana Rohrabacher, “spilled the beans” during a recent FOX interview by saying, “I have been talking to people inside the White House who know … and inside the president’s entourage. I have talked to them at length.”
He even gave a specific time frame as to when Trump will announce a plan for legalizing marijuana nationally, stating, “It could be as early as spring of 2019…”
This means we could potentially see this announcement by June 21, the last day of spring.
Not only that, but Florida Republican Matt Gaetz added, “If we were any more favorable [for the national legalization of marijuana], we might have to start our meetings with the Grateful Dead.” Gotta love the sense of humor.
House Judiciary Chairman Jerry Nadler confirmed this sentiment, adding that nationally legalized marijuana could be expected “fairly soon.” In fact, presidential candidate Cory Booker (D-NJ) along with six others are now backing the Marijuana Justice Act, which would decriminalize marijuana nationally.
When you add it all up, we could be a few short months away from the announcement of a nationally legalized marijuana industry. And just like what recently happened in Canada, I fully expect early investors to amass a quick fortune as pot goes 100% mainstream.
After all, the United States will instantly become the world’s biggest marijuana market the moment it happens.
Marijuana stocks are already on the move, but you still have time to position yourself to make a lot of money as legalization sweeps the globe and the industry grows many times over.
Please don’t wait until the major news outlets run stories about legalization. Don’t wait until your neighbor and co-worker are talking about legalization. And definitely don’t wait until legalization is a done deal.
The really big money is made by investors who are able to buy early. My entire investment career has been about this. Buying ahead of the legalization of marijuana could be one of the best investments you make in your life.
Until next time,
Matt McCall
The post appeared first on InvestorPlace.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
