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Whitney Tilson warns cannabis valuations are 'unsustainable'

Brian Sozzi
Editor-at-Large

The day of reckoning may be approaching for those trying to get rich quickly off hot cannabis stocks.

With cannabis stock valuations seemingly detached from any form of corporate financial reality, notorious short-seller Whitney Tilson said on Yahoo Finance’s Midday Movers show Tuesday it will likely end badly for investors. Tilson formerly ran hedge fund Kase Capital, but closed it in 2017 after a string of losses.

“Valuations are completely unsustainable,” Tilson said, acknowledging, though, the stocks are “dangerous shorts” because of their propensity to swing wildly higher.

Tilson is known to be a Warren Buffett investing disciple. That means crunching the numbers to determine a company’s true valuation, instead of just relying on the collective wisdom of the market, which is often wrong. In this regard, cannabis stocks continue to look stupid expensive.

For instance, Tilray’s $12 billion market cap – pushed 470% higher since its July IPO due to hype around cannabis industry growth potential – comes despite posting a mere $17 million in sales in the first half of 2018. The company lost $18 million in the first six months of the year.

Wall Street sees Tilray (TLRY) posting a 10-cents-a-share loss in 2019 on $153 million in sales. The market is essentially valuing Tilray at 78 times its future 2019 sales. Amazon is valued at about 3.2 times its potential 2019 sales, and it’s – well – Amazon, and nicely profitably, unlike Tilray.

Another hot cannabis stock, Canopy Growth, is no small bargain, either. Amid a fresh $4 billion investment from beverage giant Constellation Brands in August, Canopy Growth’s market cap has exploded 90% year to date to about $11 billon. The company has lost roughly $154 million this year on a net basis.

Big market valuations for not much in the way of profits sounds comparable to the setup ahead of the internet bubble.

Cowen, which has developed a name for itself in being one of the few Wall Street firms to cover cannabis, has a very different take than Tilson and most investors. Their guidance to clients: get long cannabis stocks such as Tilray and Canopy Growth now before you miss out on massive upside.

“Consumer-packaged-goods industry veterans are beginning to embrace the broad market potential for cannabis as a global, multi-dimensional category, given the talent migration to cannabis,” Cowen analyst Vivien Azer wrote in a research note. Azer nearly tripled her revenue-growth based price target on Tilray to $172 from $62, and raised her target on Canopy Growth to $82 from $74.

Azer sees cannabis expanding into adult use, beauty and nutraceuticals, over-the-counter pain and sleep products, and pharmaceuticals.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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