Anyone who can read the basics of a balance sheet will quickly come to the conclusion that Benjamin Graham would never touch a pot stock, including one of the best horses in this space right now, (OTCBB: PHOT).
For that matter, what would Graham be saying about today’s overall stock market valuation?
PHOT’s valuation appears to have become an issue of late.
Valuations Be Damned
Follow me on this quick point regarding valuations, first, then we’ll discuss PHOT, in particular.
Each valuation metric of the S&P 500 strongly suggests that ‘investors’ should take their money and go home, buy gold, and stock the ammo shelf. But, until institutions, hedge funds and retail investors believe the Fed has lost complete control of the US Treasury market, stocks go higher (see stock prices during the the Weimar Republic).
(Also read staunch and now former-bear Eclectica Fund manager Hugh Hendry’s rendition of mea culpa, here.)
As far as the subject of equities market valuations (including PHOT’s valuation), it’s my contention that Fed ‘liquidity’ has, and will have, no bounds—though the Fed disingenuously hints of a beginning to its $4 trillion balance sheet unwind.
After five years of the Fed’s nonsensical talk of economic recovery, it should be clear by now that the Fed is bluffing about its taper plans. Many investors and trader, alike, will be shocked at how high stocks will go from central bank money printing, just as market participants during the Weimar Republic must have been shocked.
So, at the risk of stating the obvious, experienced ‘investors’ don’t trade; they invest. But, in the case of this unprecedented central bank game of ‘enrich thy neighbor’ (to steal Ben Bernanke’s assessment of today’s global monetary policy), traders should consider that stocks will most likely move higher as central banks aid each other in the global challenge of Inflate or Die! There is no mechanism, monetary or political, which can stop them.
PHOT’s Valuation? What’s a Valuation?
Working off the Inflate of Die thesis, today’s trader has no use for valuations during the great money gush; it’s a game—a game of short-term profit to him. A discussion with traders as to whether to take a position in PHOT, which trades at 43-times sales, or AMZN (NASDAQ: AMZN), which trades at 148-times forward earnings, will end with a conclusion and a further question: Yes, the valuation is high, but will the price go higher?
Of course, PHOT’s valuation is sky high. In fact, nearly all asset prices are too high, in nearly all parts of the world, too.
Does PHOT Go Higher?
After spending half the article attempting to dispel the tired PHOT valuation argument, I believe there is plenty of momentum still left in the stock. So, yes, I believe PHOT goes higher on pure enthusiasm and massive liquidity, catalyzed and channeled into the stock due to the cult behavior PHOT engenders.
My target price for PHOT is $.50. Here’s why:
As a follow-up to my last SA article of Jan. 7, “Growlife: Missed The Big Move? Catch The Second Big Move,” I told traders to watch for the sharp break down in the stock before jumping back on the PHOT bull market.
In the Jan. 7 article, I posited the thesis that PHOT’s price and volume characteristics suggested a meaningful pullback was imminent before the stock runs higher.
To recap the theme of my Jan. 7 PHOT article:
Timing and profiting from patterns and psychology is what day-trading is all about. And in the case of PHOT, fundamentals mean nothing in this business. It’s a trade, and should not ever be misconstrued as a 401(k) retirement stock; it’s a quick money-in-your-pocket stock, a Schedule D 1040 stock.
The accompanying chart (right) to the article recommended a re-entry during phase (3)—the expected pullback in price.
Well, we saw the pullback on Jan. 9 and 10. The rebounded started on Monday, Jan. 13.
As a student of chart patterns, PHOT’s chart historically favors an intermediate price target of $.50 (next ’round number’). An initial blow-off top, more often than not, entices those who missed the first big move to ‘buy on the dips’, in the hopes of riding a second big move higher. We’ve seen this pattern play over and over since the beginning of the bull market rally in Mar. 2009. There’s nothing compelling to me at this time which suggests a break from this pattern.
Following Monday’s PHOT press release, GrowLife Expedites Launch of Expanded Stealth Grow® Commercial Line to Address Rising Cannabis Demand and Shortages, preceded by a sharp reversal in the stock’s price on Thursday and Friday, the line of least resistance for PHOT is still to the upside.
And, as a final note on market psychology, as famed-trader Jesse Livermore once said, “Remember that stocks are never too high for you to begin buying or too low to begin selling.”
Livermore also said, “The trend is your friend.”
Therefore, it’s my contention that, the PHOT price is not too high, and that, the trend in price is still higher. Ergo, I’m back long in the stock each time it sets up technically, climbing the proverbial Wall of Worry until my target price of $.50 is achieved.
I’ve bought and alerted PHOT for swing trades 3x in 2014, each of them around a +20% win for $6,120, $3,992 and $3,800. For winning trade alerts by email and text, join my premium service today.