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Why Investing in Tilray Could Be Hazardous to Your Wealth

By Chris Hill - Sep 27, 2018 at 8:00AM

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Plus, news from Amazon, Darden Restaurants, Disney, and more.

In this Motley Fool Money podcast, host Chris Hill and senior analysts Jason Moser, Matt Argersinger, and Ron Gross have a lot to tackle: They discuss a Canadian cannabis company producing big returns for shareholders, new products from Amazon ( AMZN 2.80% ), a big acquisition by Medtronic ( MDT 1.84% ), a hot quarter at Olive Garden for Darden Restaurants ( DRI 1.01% ), and an ESPN-related boost for Disney ( DIS 0.29% ). And finally, as always, the analysts will answer the question: What stock is on your radar this week?

A full transcript follows the video.

This video was recorded on Sept. 21, 2018.

Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio this week: senior analysts Jason Moser, Matt Argersinger, and Ron Gross. Good to see you as always, gentlemen! We've got the latest headlines from Wall Street. Bestselling author Ashlee Vance is our guest. And as always, we'll give you an inside look at the stocks on our radar. 

But we begin this week with Tilray ( TLRY ), the well-known Canadian cannabis company that I've never heard of until this week. It started the year with a market cap of around $2 billion. Jason, it's going to close this week with a market cap of just north of $12 billion. I'm used to seeing this kind of exponential rise with technology companies. What is going on with this cannabis stock?

Jason Moser: I'm not even used to seeing that kind of a rise with tech companies, at least not in the course of a week. I think that's what we're seeing, more or less. Coming from me, who supports legalization -- I am for it, OK -- you need to avoid this thing like plague. I mean, this is mania. That's the only real world I can offer that fits the mold in. I think a lot of it is based on speculation, perhaps, what will be one day here domestically with Tilray. It is a Canadian company. I think a lot of people are thinking that what is going on now with Canada will one day be that same way here. But this is just a wicked combination of speculation.

In Tilray's case, it's a very low float on the open market. Of the 93.1 million shares outstanding, only 19.1% of them trade on the open market. That means it's only about 17.8 million shares. Very low float means high volatility, which is what we're seeing. When I talk about high volatility, just go back to September 19th. The stock hit a high of $300 and a low of $151, all in the same day! On the 20th high of $244, low $158, all in the same day. That is not normal. We don't see that. 

That's why we tell people with stuff like this, this business and the stock, it's not based on anything fundamental. That's why you have to steer clear of this thing. Wait until we have a better idea of how legalization is going to take form here domestically, before you start placing any crazy bets. 

Matt Argersinger: Speaking of fundamentals, Chris, I think you mentioned a $12 billion market cap, if I heard correctly. Well, this company in the last 12 months did $28 million in revenue.

Ron Gross: That seems reasonable.

Argersinger: Even if the day it all becomes legal in Canada -- and, as Jason mentioned, maybe legalization here in the U.S. -- even if that revenue went up 10X in the next year, it would still be a ridiculous valuation. I think this ultimately is, just as Jason described it, a total mania. This is, for me, a buy the rumor, sell the news kind of thing. In other words, I think these companies are still going to be rallying. It's not just Tilray, you have companies like Canopy Growth ( CGC 4.83% ), Aurora Cannabis. The day it goes legal in Canada, I feel like that's the day these stocks probably turn over.

Moser: Just ask yourself, what would be their competitive advantage? What they do is grow and distribute marijuana. I knew guys who did that in college, and they weren't running $13 billion businesses. 

Hill: [laughs] It didn't have all the staging and optics of Apple's ( AAPL 3.55% ) recent event, but this week, Amazon unveiled more than a dozen new hardware products, including a microwave oven that works with its voice assistant, Alexa. Ron, I'm not even sure where to start with this. 

Gross: I want it all. [laughs] I want every single one of them. It's very interesting to me, whether it's the Echo Auto, or the Microwave, as you say, or the Clock. Who doesn't need an Echo Clock?

I think what's happening here, in all seriousness, is that we see Amazon creating an ecosystem. It's what we've time and time again spoken about with respect to Apple, and what's been so interesting for Apple. They want to be in your home, your car, your business, and they want it all interconnected through the Alexa Echo system. I actually think it makes good sense. I think they've got a nice head start on the folks that are competing against them.

Moser: I think it's amazing to think about, five years ago, we really would have all just given Apple the first-place ribbon in this race. Fast forward to now, it seems like Siri can't get out of her own way, and Amazon has just flooded the market with Echo-enabled devices everywhere. It's pretty amazing. 

Hill: Also, Matty, we've talked for years about the smart home. You look at Alphabet, their acquisition of Nest. Where is Google and all of this? What do you suppose the reaction was at Google headquarters? Again, this was a very quiet event, in some ways.

Argersinger: Yes. I think it speaks to the fact that Amazon feels like it's a lot closer to home for us because most of us use Amazon regularly. We're not always going out and buying Apple products every month or Google products every month. We're using the services and things like that. But Amazon, we're tangibly buying things for the home. This technology aspect, this platform now that we have for the home from Amazon, feels more like a natural extension, I think.

Gross: 5% away from a trillion dollars, catching up on Apple. I think announcements like this will help them. Stock still has room!

Hill: Well, speaking of the stock, we got a question from Stephen McWray. He writes, "I've developed a good problem in my portfolio. I purchased shares of Amazon several years ago at just under $300 a share. At the time, it represented about 5% of my portfolio. Today, it represents close to 20% of my portfolio. I've heard people talk about trimming a position when this happens and putting the money somewhere else to increase diversification. My problem is, I still believe in my original thesis. I believe the future is still bright for Amazon. What are your thoughts when you find yourself in this position?" Matty?

Argersinger: Stephen, this definitely goes in the bucket of great problems to have. Many investors don't experience this at all in their lifetime, so congratulations on buying a great company and holding it for this long. 20% to me personally seems a little high, if I was looking across all my portfolios. I would say this feels like, to me, an opportunity. If you still love the company... I wouldn't trim it all at once, but consider maybe selling 1% a quarter, get it down to 15%, slowly allocate elsewhere. That might be the way I'd approach it.

Gross: Everyone's risk tolerance is different. Some folks would be OK with 20%. I'm not one of those folks. I wouldn't sleep well at night. No amount of money can beat a good night's sleep, so I would trim it back. It'd be interesting to see if there's tax consequences. I'd love it if it's in a retirement account for him, and he can make this switch tax-free.

Moser: I really can't top the answers these guys gave. Everybody's risk tolerance is unique to their own behavior. Going back to all of the Echo-enabled stuff, I'm trying to figure out exactly what problem does that solve for the most part? I mean, I'm a big fan of the Echo device. We've got a few in our house. But beyond asking Alexa to play music, or a podcast, or give me the weather forecast, or convert something, I'm just not sure that it is going to solve as many problems as perhaps the headlines would have you believe.

Argersinger: But Ron wants everything! He wants it all!

Gross: I want it all!

Moser: Ron wants everything, why?

Gross: It's going to connect my home in many different ways. It's now going to be email-enabled. It's going to be able to handle a lot of your business aspects. It's going to be in video conferencing. In your car, you can have a new app that basically gives you nav, music --

Moser: It's great stuff, but when it doesn't work, it does get pretty frustrating. I'll just use my lights as an example. I have it set up to work and turn on my lights, but every once in a while, it fails, and I'm like, "Ugh, now I have to get up and use the switch on the wall? You're killing me."

Hill: Now you know what to get Ron for his birthday.

Gross: Thank you!

Hill: This week, Medtronic, the medical device giant, got even bigger when it announced the acquisition of Mazor Robotics ( MZOR ) for $1.6 billion. I'm guessing they got a good price, Matty, because shares of Medtronic were up on this news.

Argersinger: I think they did. I'm a shareholder of Mazor Robotics. I think this is one of the situations where I'm supposed to say this feels bittersweet. But actually, there's nothing sweet about it for me. I was really excited to see Mazor remain a small, independent company and see if they could grow. They're a real innovator in the area of robotic spinal surgery and demonstrating great efficacy in that. 

When they made the deal with Medtronic a couple of years ago, they did it for the right reasons. In other words, Medtronic has a massive sales organization. It would give them wider distribution, a lot more traction. But I knew as soon as Mazor had any sort of success, Medtronic was right there to buy them out. They already owned 12% of the shares coming into the deal. Not surprised by the buyout, a little bitter that I'm going to lose my Mazor shares pretty soon.

Moser: Not to be confused with Moser Robotics, which is something I haven't invented yet, but I've got a couple of ideas.

Hill: [laughs] United Natural Foods ( UNFI 0.70% ) is the largest supplier to Whole Foods. Fourth quarter results came in lower than expected and shares of United Natural Foods down more than 12% on Friday, Jason.

Moser: It's been a tough year for this company for a couple of reasons. Amazon buying Whole Foods has put them in a little bit of a different position in the value chain. Also, if you go back to July, this merger with SuperValu, in essentially this effort to consolidate on the wholesale side, it makes sense. But I think it really shines a light on how difficult this space is. 

With United Natural Foods, that relationship with Whole Foods was very meaningful. It was responsible for about 34% of their yearly revenues. The acquisition from Amazon is going to change that most likely. That relationship ends in 2025. It's not to say that they couldn't perhaps end it sooner. I think that management at United Natural Foods is feeling a little bit of the fire there. That was the impetus behind the SuperValu merger. The SuperValu merger is not going to come cheap. At the end of the day, they are still caught in this massive price squeeze as these grocers compete for the lowest cost. 

I don't know that the future really looks bright for these guys, even if they execute this merger flawlessly. It's just a really difficult business, the grocery space. More and more, United Natural Foods seems like they're in that middleman spot.

Hill: Shares of FedEx ( FDX 0.82% ) falling a bit this week after first quarter profits came in lower than expected. Ron, part of this is, FedEx is paying its employees more. That seems like a good thing for FedEx in the long run, and that seems like a bad reason to sell this stock.

Gross: Yeah, I have no problem with that. It was two things -- higher bonuses from management and wage increases for hourly workers. Management, eh, OK, I won't begrudge them a few bucks. I'm fine with the hourly increases for their workers. I think that will bode well down the road. 

I think what hit the stock a little bit here is the whole tariff thing. So far, 10% of FedEx's business in China has been affected by the tariffs. FedEx gets about 2% of their overall revenue from that region. So, I think there's some fear there, but I think it's overblown. The tariffs, I assume they're going to work themselves out. I think about it like I think about currency. I don't know how to predict it. I don't know where it's going to go. But I assume it's going to work its way out. 

Overall, I think it's a strong report. Revenue up 11%. Earnings up 38%, which was actually worse than expected, but pretty good on the heels of a lower tax rate, which everyone has obviously benefited from. They raised guidance. Shares are only 14X earnings. I thought the report was great.

Hill: Back in April, Disney launched its ESPN+ streaming service with a price tag of $5 a month. This week, Disney announced it now has one million subscribers. Obviously, they're looking for more than that, Matty. But this is a pretty good start, five months in.

Argersinger: I think it is, I think a lot of the investing community was pretty skeptical about this when they first announced it in 2017, and certainly after they debuted it just a few months ago. But, hitting a million's huge. I think Bob Iger on the last conference call hinted at that. He said conversions from free trials are going well, subscription numbers were stronger than expected. 

I think this is good news. It makes investors feel a little more confident about what's happening next year, which is the Disney app, which I think is the bigger platform, the bigger subscription service they're going to launch. It comes on the heels of ending the distribution agreement they have with Netflix

I'm still a little bit worried. I'm glad to see the traction, but I worry still that there's just too many choices now in front of consumers. It's nice that people seem to be paying up for this incremental ESPN content. But I feel like Hulu is still out there. They're going to get a majority stake in that. I feel like that's their best bet. That's the best platform for them to compete with the Netflixes and Amazons, YouTubes of the world. I imagine that eventually, a lot of that Disney content is going to flow there, as well. 

Hill: That's one thing to keep in mind, though. When they get that access to Hulu, do you think on some level, they are building these apps with Hulu as the backup plan? Maybe not so much with ESPN+, but certainly with the movie streaming app. In the same way that there's original content on ESPN+, Katie Nolan's show and other things like that, there's also original content in the works for the movie streaming service they've got next year.

Argersinger: That's right. You put it great, Hulu is the backup plan. They're trying out these separate brands. ESPN Sports, Disney content, Star Wars, Marvel, all that. Hulu probably feels a little too broad, almost like a cable service. I know, Jason, that's how you started to think about Hulu Live and things like that. Maybe you're right. I think, if these apps don't gain a lot of traction, all that stuff ends up on Hulu anyway.

Hill: The restructuring continues for Under Armour ( UA 1.92% ) ( UAA 1.96% ). The sports apparel company announced its second round of layoffs in the past year. Jason, we don't like seeing people lose their jobs. Hopefully Under Armour is, if nothing else, getting smarter about how to run their business.

Moser: On the headlines, it is more people losing jobs. But from the investor's perspective, this really is an indicator that CEO and founder Kevin Plank is listening to his team and acting on their advice. In this case, CFO David Bergman. They laid this goal out earlier in the year. Instead of focusing on top line revenue and growing this business as fast as they can, to get back to where they are at this stage of the game. Focus on what they have, trim the company down, get rid of the fat, focus on profitability, become more efficient, become leaner. And then, over time, if you run a good business, it will grow. If you have a brand that people want, it will grow. If you make products that people want, they will buy them, and your business will grow. This really is in line with that goal. I think it makes a lot more sense. 

I think that one of the biggest mistakes Kevin Plank made -- with all of his success -- I think the mistake that he made was always pinning his desire to supplant Nike as the No. 1 athletic brand of the world. I think you can do that, but you can't ignore the fact, it took Nike a while to get there. You can't just say you want to do that then do it overnight. Time is a part of that equation. Under Armour is going to have to put in some time to do that. I think that they've got some decision-making going now that has this company headed back in the right direction.

Hill: In terms of the next 12 months for Under Armour, how big is the e-commerce channel? One of the things we've seen recently with Nike is, they've done a good job of building that out.

Moser: With Under Armour, it's very much the same story. We see, with Sports Authority going under, with Dick's Sporting Goods having its own challenges, Nike and Under Armour continue to push that direct-to-consumer channel. It's responsible for about a third of Under Armour sales today. I expect it will become more as time goes on. Definitely, they will continue to invest in that channel.

Hill: The award for IPO of the week goes to Eventbrite ( EB 6.89% ). Shares of the ticketing and event technology platform rose 70% on its first day of trading. You tell me, Matty. Is Eventbrite a stock I need to put on my radar?

Argersinger: Well, it's an interesting company. I'd qualify that 70%. Even though the IPO price was $23, it actually opened for trading at $36. Us public investors never had an opportunity to buy at $23. Still a very impressive debut. 

The company, as far as I understand, it's really focused on the smaller creators. Anyone from small artists to fundraising, things like that, and creating events, selling tickets to those things. You have $255 million in revenue over the last 12 months. That's growing about 50% per year. Market cap right now is around $3 billion, so the valuation is high. I wonder how they compete or measure up against a company like Live Nation, which also does events, but obviously on a bigger scale, and also owns venues and has relationships with artists. I think Eventbrite is probably a company that's going to focus on the smaller events, smaller artists. Maybe that's their niche.

Hill: That's the thing. When you look at Eventbrite's business, and the venues they're working, with the acts that they're working with, in the same way that we talk about young start-up beverage companies, part of their goal is, "We just want to be bought by a much bigger beverage company," I'm wondering if part of Eventbrite's idea is, "Hopefully at some point, Live Nation is going to buy us."

Argersinger: It's possible. But I wonder if Live Nation would ever be interested in doing things at this kind of scale. But, hey, if Eventbrite proves the model out... They've obviously had some nice traction. They served 700,000 creators and events last year. There's something to the business. 

Hill: First quarter profits for Darden Restaurants came in higher than expected. Darden is the parent company of Longhorn Steakhouse, Capital Grille, and of course, Olive Garden. Darden shares falling a little bit, Ron. This was a good quarter!

Gross: It's a very strong report. As you said, they beat on both sales and earnings. That's strong. The one dark spot is that Cheddar's Scratch ain't making no scratch. Same-store sales for that chain down 4%. But overall, the blended same-store restaurant sales increased 3.3% with Olive Garden, of course, leading the way at 5.3% comp sale increase. 

I think things are going well. Labor costs are higher pretty much across the board. That's not surprising. But they did see a drop in food marketing and other restaurant costs, which helped to offset it. They raised guidance. Very strong report.

Hill: Let's go to our man behind the glass, Steve Broido. Steve, before we get to the stocks on our radar, how much credit would you like to claim personally for Darden Restaurants' strong quarter?

Steve Broido: I did eat there yesterday, and I'm not kidding. The thing is, I get a lot of gift cards because people think I love the Olive Garden, because I do love the Olive Garden. So I came with three gift cards. I was like, "I don't know how much money's on these." I got a free meal. It was great!

Hill: That's fantastic. That's going to show up in next quarter's report.

Broido: Next quarter, yeah.

Hill: You're welcome, shareholders. Let's get to the stocks on our radar. Steve will hit you with a question. Ron, you're up first. What are you looking at this week?

Gross: I'm going to go back to Oaktree Capital ( OAK ), OAK. This is a stock that has not done well, year to date down 6%. That's because they are an alternative asset manager that just quite frankly does not do well in this extended bull market. They work on distressed investments, investments that typically don't go up in this type of a market. Their time will come, though. They have a stellar track record. They have a dividend in excess of 5%. When things finally go down, they will benefit.

Hill: Steve, question about Oaktree Capital?

Broido: If you had to give the elevator pitch for Oaktree, what would it be?

Gross: Long-term stellar track record that will eventually benefit when the cycle turns.

Hill: Jason Moser, what are you looking at this week?

Moser: In the spirit of the Ryder Cup, which starts next Friday, looking a little bit more closely at Callaway Golf ( ELY 6.57% ), ticker ELY. For the most part, I've eschewed investing in golf altogether, with my experience in the business. It's just not the highest margin game. I'm actually more interested in Callaway's minority stake in Top Golf, which is the driving range concept that marries hitting golf balls with the social dynamic, as well. You meet your friends there for food, drinks, they have sports on TV and whatnot. There are around 41 Top Golfs today. The goal is to open another 100 here domestically, as well as 100 internationally. Already very profitable, and Callaway has about a 14% minority stake in it. They intend to continue investing in it. It's got my attention.

Hill: Steve, question about Callaway Golf?

Broido: Do people buy golf clubs online? Or is this something you need to really touch and feel and hold on to the thing to make the purchase?

Moser: That's a good question. A lot of people do buy them online, but club fitting today is more popular than ever before. Most people who are serious about the game typically go get fit for clubs before they buy them.

Hill: That means Jason doesn't buy online. That's what I take from that. Matt Argersinger, what are you looking at this week?

Argersinger: I'm going with Disney, ticker DIS. We talked about it earlier in the show. The Fox acquisition is probably going to happen. It's going to muddy the waters a little bit. But ultimately, I think you have what was already the premier entertainment company in the world, but by far now the premier entertainment company in the world. I really applaud Bob Iger a year ago for essentially going all-in on streaming and really shifting the direction of the company. It was bold. We're seeing a little bit of traction now finally with that. I think the table might have turned for them. Stock trades for less than 15X earnings. I just don't think that lasts very long with a company like Disney.

Hill: Steve, question about Disney?

Broido: What was going on with that Han Solo movie? Can someone tell me? That was in the theaters, and then 10 days later, it was gone. What happened?

Argersinger: I actually didn't see the movie, and -- well, there you go, that's the problem.

Broido: No one else did, either!

Argersinger: [laughs] That's right. Can't explain it.

Hill: Disney, Callaway Golf, Oaktree Capital, you got a stock you want to add to your watchlist, Steve?

Broido: I might go golfing!

Moser: Hey, now!

Hill: Jason Moser, Matt Argersinger, Ron Gross, guys, thanks for being here!

Moser: Thanks!

Gross: Thanks, Chris!

Argersinger: Thanks, Chris!

Hill: That's going to do it for this week's edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$171.18 (3.55%) $5.86
The Walt Disney Company Stock Quote
The Walt Disney Company
$150.81 (0.29%) $0.44, Inc. Stock Quote, Inc.
$3,523.29 (2.80%) $95.92
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$24.45 (1.96%) $0.47
United Natural Foods, Inc. Stock Quote
United Natural Foods, Inc.
$49.12 (0.70%) $0.34
Medtronic plc Stock Quote
Medtronic plc
$112.27 (1.84%) $2.03
FedEx Corporation Stock Quote
FedEx Corporation
$247.06 (0.82%) $2.01
Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
$148.12 (1.01%) $1.48
Callaway Golf Company Stock Quote
Callaway Golf Company
$28.37 (6.57%) $1.75
Oaktree Capital Group, LLC Stock Quote
Oaktree Capital Group, LLC
Mazor Robotics Ltd. Stock Quote
Mazor Robotics Ltd.
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$20.76 (1.92%) $0.39
Canopy Growth Stock Quote
Canopy Growth
$10.64 (4.83%) $0.49
Tilray Stock Quote
Eventbrite Stock Quote
$15.21 (6.89%) $0.98

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