Why Jordan Eberle Should Remain

A strong sample size of Edmonton Oilers armchair general managers want Jordan Eberle gone. A poor regular season performance coupled with zero goals in 13 playoffs games cannot justify his $6 million salary. He's the whipping boy of the current season. It was formerly Justin Schultz, Shawn Horcoff, and Devan Dubnyk. It is an annual tradition in Edmonton, and probably most major hockey markets, to find the weakest link and trade him. But, he's useless, according to Oilers fans, so what team would want him? In this man's opinion, if the Oilers decide to offer him up at the expansion draft or trade Eberle, there would be a strong list of teams that would be willing to acquire the 6-million dollar man but the list of teams willing to offer fair value for Eberle would be short, extremely short.

In finance, herd mentality offers up big opportunities. When the market is selling, long-term investors can find discounts on strong assets, and this is similar in sports. From the Oilers perspective, Jordan's stock value is low, at least in this city's eye, but what is our junk is going to be another city's treasure. And other GMs know this and will give the team as little as possible because they know everything outlined below.

Jordan Eberle completed his 7th season in the NHL with 51 points in a full campaign. Compared to his professional career, this is definitely below his average. He has 3 seasons with more than 51 points and 3 seasons with fewer than 51 points, but in the worse seasons, Eberle played just 69 games twice and the other season was the NHL lockout. So, on a points-per-game basis, this was his worst.

Jordan Eberle finished 94th in the NHL in points, 88th by forwards, 21st by right wings, and 3rd on the team. There were a total of 888 skaters that recorded one game played in the year. 94th puts him in the top 11% of the league in points-production. And players that finished with 53-49 points include Corey Perry, Taylor Hall, Anze Kopitar, Henrik Sedin, Joe Thornton, and Jason Spezza. Are you surprised to see a list of elite players (subjective) that surround Eberle's name in the standings? Or were you expecting to see the likes of Alex Chiasson, Mike Fisher, and Max Domi? No offense to these players either.

That list of elite players also have one thing in common. They are all paid at least 6 million USD. If Jordan Eberle's poor results do not justify his salary, then that is your opinion. Businesses and NHL GMs need more than just an opinion before making any decision and the facts do not support how poorly a season fans claim.

Here is the fact: if we look at it on a point-production basis, Jordan Eberle would be a first line right-winger on at least ten teams and a guaranteed second liner on all. Although there are players that make less money and produced more, there is a longer list of players that make more money and produced less.

If Oiler fans feel the need to blame the Oilers failures on Jordan Eberle or criticize his season, go ahead, you have every right. But replacing Jordan Eberle holds very little merit when we consider the data from around the league. In fact, compared to Thornton, Kopitar, and Spezza, Eberle's salary is a steal. If you want him gone and replaced with another right winger, try to find one on the market that has an opportunity to come to Edmonton for cheaper and produce more points. Because right now, the only noise I'm hearing are complaints that do not come with any solutions.

Weed Stocks: A Further Analysis

Photo credit: Drew Angerer — Getty Images

The euphoria that took the Canadian stock market by storm at the end of 2016 has subsided as marijuana stocks have traded essentially flat year-to-date. Investors paid heavy premiums (based on traditional valuation methods) to access the budding industry with the hopes of being part of the next big thing. Muted trading has given the market a breather and provides us a moment to analyze the shares. Are stock prices trading at a premium or a discount? Will investors make money or should they bail at break-even? Will this industry become as large as the rest? Here are some facts which we will use to provide you with both a bullish and bearish case.

In 2016, the state of Colorado reported total revenue of marijuana sales at $1.3 billion US. This equates to a total base of about $225 US per resident. The government projects sales will rise another 25% in 2017 which will generate $250 million in tax revenue for the state. This revenue projection would equate to about $280 US per resident.

National surveys done in the US showed a reduction in teen usage in the state of Colorado compared to the national average and a slight reduction in teen usage year-over-year within the state. Most international surveys also cannot prove or come to the conclusion that the legalization of marijuana increases total usage and some surveys draw the conclusion that total net consumption is reduced.

Canada projects total users (above the age of 15) to exceed 5 million if/when marijuana becomes legal in the country. However, total market consumption is undetermined.

When industries are newly forming and do not earn a profit, one metric used to measure a public company is by the price-to-sales ratio (PSR). This divides the stock price by its revenue per share or alternatively, divides the market capitalization of the company by its total revenue. The industry with the highest PSR is Internet software (6.66) and the lowest is auto parts (0.67). Click here for the full list.

Metrics

If we draw parallels from Colorado and apply it to Canada, and we expect that consumer trends remain similar, the expected size of Canada's weed industry should be $10 billion CDN assuming the average resident consumes $280 of weed per year (note we removed foreign exchange from the calculation as marijuana would most likely be unaffected by foreign exchange or futures markets).

The three most prominent stocks in Canada by market cap are Canopy Growth (WEED), Aphria (APH), and Aurora Cannabis (ACB) with a combined market capitalization of $3.15 billion CDN. Their 2016 revenues were $30.27 million, $15.07 million, and $4.51 million; a combined $49.85 million. This results in a PSR of 63.19.

Bullish Case

The legal weed industry is still in its infancy and the market has discounted its potential value. A $10 billion market could push stock prices higher. With a comparable PSR to tobacco of 5.66 (or 6 for simplified math), this would value the total industry at almost $60 billion in market capitalization, which is about 20 times more than the current value of the three companies mentioned above. Triple-digit growth proves that there is significant growth and it may not peak or plateau for years down the road.

Legalization could also increase tourism and it is estimated that an additional 900,000 Canadians would consider trying it after legalization according to a recent survey. The total market capitalization predictions also exclude the potential for expansion into the US which has a market ten times larger. There is a strong movement for legalizing in the remaining states to boost government tax revenue.

Bearish Case

Bears do not doubt that these businesses will grow, however, their shares may not. Current PSR show that the market is pricing the stocks almost ten times more than the highest industry. Its current PSR of 63 requires growth over 1,000% (or 11-fold) before its PSR matches the tobacco industry. A projected 20-times increase in revenue would only double the stock (at most) and this assumes Canopy, Aphria, and Aurora control more than 99% of the market share. The second assumption is that market capitalization does not grow due to increased float, which means the company issues shares and reduces the amount of ownership per unit.

The most recent quarter showed Canopy posting revenue up 180%, but the shares declined 8% on the news. Premiums are now catching up with fundamentals and the $10 billion projection could be an overstatement due to concentrated data from Colorado. In economics, the law of big numbers indicates that a company growing rapidly cannot maintain that level of growth forever because there are fewer new customers available. If this law applies to weed companies as well, it can be inferred that the following quarter will show less than 180% growth which results in an "asymptote-like" chart; a plateau or peak is an inevitable part of any business.

The $1.3 billion generated in Colorado includes tourism revenue. This is an important fact to dissect because it would provide evidence where revenue can plateau. If legalization hits all 50 states, would revenue specific to marijuana be reduced for Colorado on a resident-based average? The current projections assume $280 spent per individual, but in Canada, only 5 million (or about 15%) of Canada's population would be a regular consumer. This means that in a room of 7 people, the one individual would generate revenue of $2,000 directly to the producer.

When Should You Dump Your Mutual Funds?

The 2016 RRSP deadline is fast approaching; that means large lump sum contributions for many. The majority of that money is allocated into debt (bonds) or a mutual fund. Most employee savings plans and pension plans directly buy mutual funds, but mutual funds are not necessarily the best choice for the average consumer due to their fees. As one's wealth rises, it may be ideal to move away from them, but when should you dump your mutual funds?

Firstly, what is a mutual fund? Essentially, they are professionally managed portfolios. They provide access to the bond and equity markets with minimal capital. In most cases, mutual funds do not charge for transactions. Instead, their earnings are made through a management expense ratio (MER) which is used to pay employee salaries, accountants, lawyers, and other operating expenses. These fees tend to be between 2-3% of the fund's net asset value. Although this amount seems small, these fees add up over time, and we are here to expose how much money is actually lost by retirement.

Let's assume you are contributing equal payments of $10,000 annually for 40 years into a mutual fund with an MER of 2.5%. We will also assume there is zero net growth in the fund to simplify the calculations. This means the fund's value rises equal to the MER and thus shows no growth.

In the first year, the MER paid would be $250 and in the 40th year, the MER paid would be $10,000. If you've forgotten the formula for this kind of arithmetic, it is (first year's MER plus final year's MER)/2 multiplied by number of years. We can see that the total MER paid by you is $205,000. While your retirement account is worth $400,000. The total MER paid is over 33.8% of your total wealth.

Of course, that's not all. Depending on the source, it is measured that in any given year, just one-quarter of all mutual funds will beat their benchmark. Over the long-term, less than 0.1% of funds outpace the index. In 2014, a report by Jeff Sommers, writer for the New York Times, concluded that just 2 funds out of over 2,800 beat the S&P 500 for five consecutive years (2009 to 2013). Both were small-cap funds, and thus, had a higher probability of beating the index. Unfortunately, both funds, in 2014, failed to maintain their run.

There is strong evidence to support that active funds cannot outperform an index, and this information is vital for investors looking to manage their own capital more efficiently. The alternative to mutual funds would be index funds, such as the iShares TSX 60, SPDR S&P 500, or SPDR Diamonds Index. MER's for these ETF trio are roughly 0.10%. Assuming zero net growth, the total MER paid over the same period is $8,200. If the index also grew by 2.5%, you would have an additional $196,800 at retirement, almost 50% more, by reducing your overall fees. These gains exclude potential capital appreciation and dividends, which historically yields 8% on average.

So getting back to the original question, when should you dump your mutual fund? Most self-directed registered accounts at a brokerage will charge up to $125 a year if the total equity is below a certain threshold. And trades on ETFs will run about $10. This translates into an annual cost of $135. Based on all that has been discussed, if your total portfolio exceeds $5,400, then it may be profitable to move your mutual fund into an index fund.

Many investors stick to mutual funds because they lack investment knowledge. Their lack of confidence or education persuades them towards products that are managed professionally, but as we see, spending just an hour a year educating yourself will pay significant dividends down the road. Even by simply making this transition, you will be 50% richer.

Minh Luu is a former Canadian investment representative with a major in finance. All advice and information in this article is opinion-based and is not a recommendation on buying or selling. Always speak to your investment advisor.

Put Options Versus Stock Ownership

Traditional buy and hold strategies have long been proven effective over the long term, especially when investors select quality companies. However, buy and hold is actually the least efficient investing method when it comes to generating returns. Although we have a bias for options, it is important that investors educate themselves on alternatives to just buy and hold because beating the market while driving on the same highway as everyone else is nearly impossible.

Hedge fund managers and professional traders often employ the use options over owning stock. Stock ownership requires significant capital and produces lower returns versus selling options. The advantage of using options is the ability to profit even when the stock falls; stock ownership has no room for error.

Take for example Google shares, now known as Alphabet. Priced at $827, these shares are most likely out of reach for the average investor looking to fulfill a board lot. This would require almost $83,000 just to avoid interest. However, selling a put option just out of the money (820 strike) would require only $17,200 cash. The difference in capital requirements is staggering and can actually limit the demand for companies. The ability for younger or financially strapped investors to buy and hold is often burdening and not possible.

If we take the 2018 LEAPs, you can sell the $820 puts and earn $67 a share. This is immediately paid to you. Regardless of what the shares are valued in a year from now, you keep the $67. This represents a return of almost 39% for the year. To match the same return in percent for a stock owner, the shares would need to climb to $1,150. To match the return in dollar value, shares would need to climb to $894. Now, selling a put does have its own risks as well. If the shares fall, you would be obligated to buy the stock at $820 or close the option. However, if the shares are worth more than $753, you would still be left with a profit. This advantage only lies with an option trader.

If the stock owner had purchased the shares in 2017 and held them for one year only to see the shares fall to $770, the stock owner would see a paper loss of $57 a share or $5700 per board lot. We however, have seen a profit of $17 a share or $1700. The cost to close the option on expiration date would be $50 but we received $67. This is an example of more efficient investing. Since Alphabet shares do not currently pay a dividend, there is no added benefit on owning the shares with the exception that the stock could be worth more than $1,150 in a year (let's see how it plays out), but this is worthwhile trade-off for option traders. It is very rare for a stock to return 40% a year every year and in the long term, the reality is that the option trader will be better off than an investor with a buy and hold strategy.

Weed Stocks Getting High, Maybe Too High

Share prices of marijuana companies have soared since their debuts. Prices are now at a critical point. New investors are being lured into the world's largest casino - the stock market - and that is a red flag for money managers.

On Wednesday November 16, 2016, six major marijuana stocks tripped circuit breakers on the Toronto Stock Exchange after spiking up at least 10% in five minutes. Circuit breakers were put in place to prevent unusual trading patterns from continuing in either direction. This triggers a halt, which can last as little as a five minutes or as long as the remainder of the day, and allows traders and investors an intermission to re-examine the price movements and prevent panic selling or irrational buying.

However, the major moves seen on Wednesday, with stocks opening as much as 44 per cent higher then losing all of their gains in an hour and continuing to fall further, indicates that support in prices has left the building. We are in a gambler's environment that risk intolerant traders should highly avoid. Although there will always be opportunities to make money, it appears it will be out of luck and not proper timing. A person that purchased shares on Wednesday morning would have lost half their investment before the trading day had ended. The inability of novice investors to understand irrational exuberance cannot be understated. Momentum is a greedy and risky game that always ends up in losses for the last man because the well of buyers eventually dries up.

History often shows that a mass entrance into an asset class coupled with significant volatility may well be the final period of upward momentum - the end of a bubble as they say. In this century, we have seen speculators hop onto the bandwagon of uranium, silver, potash, Bitcoin, and Internet stocks, just to name a few. The prices of most of these assets have broken down from their highs coinciding with similar mainstream euphoria we are currently observing. And major companies like Microsoft took 15 years to re-reach those prices.

Supported by the belief that regulatory bodies in Canada and the US will provide better access to marijuana and increase sales, as valid and factual as that may be, what many novice traders are ignorant of is proper valuation. On Wednesday, for a brief moment in time, Canopy Growth was worth $2 billion, doubling its value from Friday, which was also a record high.

The unicorn of the industry, earned $12 million Canadian in revenue over the last 12 months with a net loss of $3.5 million. Penny stocks are very hard to valuate because their projected growth in revenue are unlimited. In a decade, it is highly possible for this company to be generating over $100 million annually. Once it reaches maturity, to maintain its $1 bilion market cap, it would have to generate at least half a million in revenue per year or offer net income of around $100 to $200 million. Essentially, if you purchased the stock today, the company would need to grow sales more than 40 times to more accurately justify its current price. That's not to say the price won't climb to fresh highs. Growth companies are given heavy premiums, but long-term investors won't be finding any deals in the near future.

The industry itself is growing and the drug is more accepted. Money always trumps morals as some would argue, but governments acknowledge the reality that weed is a money-making machine, and there's a reason why so many gangs and illegal producers have lobbied to prevent and oppose its legalization. The truth is that these companies will make more money than they do today, but with low barriers of entry, the question you must answer is whether the value of a company's stock price will climb with the growth of these businesses and how will increased competition affect overall business?

Money managers, aka the professionals, are staying clear of the trade and will re-examine once euphoria wears off. Valuations are seen as "stupid" and that will prevent many of these stocks to price much higher without investment and price support from billions of dollars. Although we have seen some big bought deals worth at least $35 million, this could bode well, but cuts short-term prices.

To quickly explain, a bought deal is when an investment bank or firm secures shares from the company. However, the investing client is given a discount to the market price and they then attempt to sell shares to their clients or in the stock market. This could lead to a supply glut and undermine current strength.

Not all money managers are as concerned in the short-term. A Jacob Securities money manager believes and predicts "...there is a fundamental business to support here. People want recreational cannabis ... If you have a longer investing horizon then you’ll do fine — these stocks will be trading higher a year from now than where they are trading today."

Disclaimer: the author and its household do not own any nor are short stocks and industry related stocks mentioned in the above article and do not have any derivative positions.