It always amazes me how much hype can be created when it comes to the stock market.
The question is, where does the hype originate from?
From what I have noticed, it is usually one of the following two things:
- The person on the street who is familiar with a certain brand/company which he/she feels will do well because they enjoy their product/services and they have a sense of trust in the company. E.g. Uber – They enjoy the easy and simple transportation service that they have to offer and because it is something that they can personally relate to, they feel the company will do well and that in itself is a good enough reason to buy Uber shares.
- People focused on shares/instruments that have grown exponentially over a very short period of time. E.g. Bitcoin and shares in the Marijuana industry.
The problem with the aforementioned is that people rush to the market to buy shares for the wrong reasons.
Below is a chart of the total return (total return includes interest, capital gains, dividends and distributions realized over a given period of time) comparison between the S&P500 and MJ (MJ is a marijuana ETF which tracks the Prime Alternative Harvest Index, designed to measure the performance of companies within the cannabis ecosystem beneﬁtting from global medicinal and recreational cannabis legalization initiatives).
Since 1 December 2015 the Marijuana ETF has underperformed the S&P500 by 56.74%, yet I have received numerous phone calls from current and prospective clients who enquired whether they should buy into the marijuana frenzy.
To put this into monetary terms, if one invested a $100 000 each into the S&P500 and the marijuana ETF, the valuation of each investment today would look as follows:
- S&P500 = $153 070 (a gain of 53.07%)
- Marijuana ETF = $96 330 (a loss of 3.67%)
S&P500 vs MJ (Marijuana ETF)
Another example within the cannabis industry is Tilray Inc, which is a supplier of cannabis products to pharmaceutical distributors. The Company is focused on medical cannabis research, cultivation, processing and distribution of cannabis products worldwide.
Tilray was listed on the NASDAQ in July 2018 via an IPO (initial public offering). In two months its share price peaked at $300.00 (856.05% higher), due to the hype of being the first cannabis company to debut on a major U.S. stock exchange. Currently Tilray is trading at $21.37 (4.56% lower than its first day on the market).
Two of the most highly anticipated IPO’s for the year in the U.S. were Uber and Lyft, both operating in the same sector. Uber, which had a private valuation of $76 billion ahead of its IPO in May, has seen its valuation drop steeply to its current market cap of roughly $49 billion.
Similarly, Lyft’s market cap is hovering around $11.6 billion, compared to its last private valuation of roughly $15 billion.
According to Renaissance Capital, no company has lost more money during the 12 months before its IPO than Uber. Lyft was No. 3 on that list, yet there was a lot of noise and hype created around both these IPOs.
Below is a comparison between the S&P500, Uber and Lyft. It is not difficult to see the dismal performance of both companies compared to the S&P500.
S&P500 vs Uber vs Lyft
Except for Uber and Lyft, I would also like to point out four other companies that had IPO debuts within the last 18 months with their gloomy performance since their market debuts as follows:
- Peloton Interactive: – 13.59%
- Fiverr International: – 48.35%
- Chewy: -20.38%
- Slack Technologies (Work): – 41.53%
Below is a comparison between the S&P500, Peloton, Chewy, Fiverr and Slack (Work).
S&P500 vs Peloton vs Fiverr vs Chewy vs Slack (Work)
What concerns me the most is that all the aforementioned companies are companies with no earnings history. What will happen to these companies if the economy turns south and not even to mention a possible global recession?
Do your research before buying shares. In all my years of being a market professional, there is one key notion that people fail to understand, a good company or a company with a good brand is not always a good investment. A good investment is a one that is priced right when you enter. Be careful of being sucked into the hype or worried of missing out on a share that could double or triple, because it can half in value just as easily.