A pot with a bite - why it's not the solution to British American Tobacco's $BTI (-1.14%)
$BATS (-0.01%)
dwindling share of smokers 🌬🍁
Hello everyone,
I've been taking it a bit easy with Getquin over the past few weeks, but today I'm going to highlight one of your apparent favorite stocks: British American Tobacco. For the structure of the analysis, I will divide it into 2 chapters:
Part 1
- Current status of the share based on fundamentals & short interest
- Basics on the effects of cannabis using the main ingredient THC as an example
Part 2
- The importance of cannabis for British American Tobacco
Part 1 - Current status of the share 🕵️
This time, however, the whole thing will be approached from a completely different angle: Can medical cannabis or, after legalization, the German market help BAT to achieve its former greatness?
Important here is the DisclaimerThis is not an investment advice. It is also not an invitation to buy / sell financial products. I describe here only my opinion. You have your own responsibility towards your investments. So I also assume no liability.
You have already read it - I am ranting about "old greatness". If we look at the chart from today (July 17) and compare the 32.96 USD with the price 6 months ago, we see a decline of 14.43%. It becomes worse, as soon as we push the regulator on the year to year comparison. Then we see a loss of -18.46%. A richly lousy performance for a stock with expected revenue growth of USD 0.8 billion from 2023 to 2024 (see (1), (2)).
Where does the share currently stand?
We see that the current P/E ratio is 8.55 of current earnings. The PEG ratio as a fraction of this P/E with the expected growth in earnings per share is:
PEG RATIO = 8.55 / 11.8 = 0.73
So we see that currently just 73% of the expected growth over the next 5 years of earnings per share COULD be priced in.
Why COULD?
As a simple look at past EPS growth shows, year to date EPS growth has been 1.7% year to year comparison. The quarterly performance of -6.31% indicates a significant depreciation in the stock. This would go hand in hand with short sellers (these are so called short sellers) jumping on the stock as well. If we look at the data, however, an exponentially high occurrence of short sellers is not noticeable at all. Specifically, 4,890,000 shares were sold "short" on 6/30. This means that I, as a seller, do not own the stock at all, but I sell it to you.
Why can I do that?
The trick is quite simple and resembles a cash bet on who can drink the most. I bet you that I will sell you a beer in a week and that I will be nice enough to do so at a discounted price! Am I not nice?
The answer is: No. I would not be in this case.
Selling short is something I would have done in the past only if the fundamentals no longer convinced me. So I expect the price to drop further and sell you the beer in a week at a higher price than it's worth right now.
Why would I go for something like that?
If I am wrong as a short seller, it is theoretically possible to make big profits. However, only if the expert or the offering capital market institute judges worse than you. This requires some self-confidence to make such bets. At BAT we see that currently +15.9% of shares have been sold short. But that's just 0.2% of shares in free float. If I wanted to influence the market at this point, I could have made a great YouTube thumbnail with the title (see (2), (3), (4)):
"OH NO! SHORTSELLER RATE DOUBLED! GOES BAT NOW BROKE :O :O"
The statement would even be correct when compared to 4/30/2023, where only 0.1% of the shares were traded short. But now 0.2%!
What I find exciting about this is the valuation of this. While since 15.5.23 the short shares relatively constant in the interval:
K e I(3,590,000, 4,890,000), values beyond the 9 million mark were quite common in the past. So we can see very quickly that the mere number does not say much at first. What is important is the valuation of these shorted shares. While we sold the mentioned 3,590,000 shares short on 5/15/2013, this resulted in a value of 133.48 million USD (cf. ibid.).
So what?
The last known date of short sale of BAT shares included significantly more shares and was valued at USD 162.35. That is (cf. (3), (4)):
4.89 million shares at $162.35 million yields a more significant share price discount than
3.59 million shares at 121.7 million USD
What could this mean?
We must not forget that we are here at a very low percentage of shares sold short. Apparently, there is no pessimism among analysts, because otherwise marks of 10% of shares are also quickly reached. So we are seeing smaller trades to raise capital. Not a definite bet on the imminent demise of BAT as a group on the part of the analysts (see (4)).
The whole thing then lines up when looking at market cap and shares outstanding. In January, the outstanding shares were still at 2.23 billion shares. However, we are now at 2.23 billion shares at the time of this analysis. So, we see that there are currently an average number of shares available for trading in the market. This tends not to be a good or bad sign - but may suggest that there is not a particularly strong interest in BAT stock from investors. Despite the share price losses described (see (1), (3)).
It seems to me that this circumstance is particularly important, since in January the dividend was still 6.88%, but in the meantime we are at 8.19% dividend yield. So: although the dividend is just higher by 8.19/6.88 = 19.04%, the stock still fails to excite investors. At the same time, BAT's total return since the beginning of the year is just -9%, which is not even a double-digit loss. The P/E ratio of 11.6x in January and now 8.7x does not seem to be a reason for many investors to enter BAT (see (1), (3)).
As a result, we have a share whose short interest seems to be within limits, but which now has to bear a disproportionate dividend and now has to find answers to many questions about the CAGR (annual growth rate of replacement products).
Part 2 - Basics on the effect of cannabis using the main ingredient THC as an example 🏥
An essential topic at this point is certainly Germany.
Why?
Simply put, Germany could become the largest legalized market for cannabis. I'll leave it up to you to decide what you think about the legalization of drugs, but we could (unusually) become a pioneer in the economic field.
The traffic light coalition plans the gradual release of cannabis for "pleasure purposes". So don't forget: Whoever does not enjoy it commits a crime! (Joke aside)
It is here often the column picture for the explanation of the proceeding selected that 2 columns provides. In the first step, the possession of 50 grams of cannabis is to be permitted for persons over 21 years. For the intermediate period 18 - 21 years the federal government plans 30 grams (see (5), (6), (7)).
Why this differentiation?
Essentially, it is justified on the basis of brain maturation. One is of the opinion based on studies that cannabis in adolescence can often be accompanied by a lack of drive based on a lack of development. Therefore one would like to restrict the temptation of a dissolute consumption here over the delivery quantity. Whether this really makes sense, I leave to you again.
In another world (in which I would have something to say about it), there would be no cannabis for under 21 year olds. Certain studies even demand to set the limit at 25 years. I link you to an interesting study under (8), which demands exactly that. No cannabis under 25 (see (8)).
Why am I a killjoy here?
The reason is simple - and everyone can understand it if they want to.
What keeps us working every day? What makes us go to the gym, even though we know full well that we'll be sweaty, tired, and barely able to lift 2 cases of Coke with strained muscles afterwards? (Depending on how hard you train and how often).
"Huh - yeah because I want to look good?"
No. Because your head rewards you effort. Because your body is set up to survive. Because you need it, otherwise you risk muscle atrophy and cognitive decline.
What does this have to do with cannabis?
A lot - and I have already made enemies with the following reasoning.
THEN: How does your body manage to get you out of bed every morning? Why doesn't that work with certain sufferers of depression?
CORRECT: Dopamine. This is a neurotransmitter that (in a very simplified way, this is a stock market forum, not a medical forum) causes motivation and stimulation.
Cannabis is unfortunately suspected to hinder exactly this formation of a healthy dopamine system. However, not in adulthood, but rather in the developmental stage (cf. (7), (8)).
How does cannabis do that?
Relatively simple: THC (tetrahydrocannabinol) can bring this dopamine system to its limits relatively quickly with constant use.
Our bodies are not designed for constant reward without effort. A simple example: Your car broke down and you have to push it 300m up the hill, because the towing service can get there better. So you do this with friends and park the car there. The towing service comes and picks up the car. "What an accomplishment!" Thinks the brain and rewards you with a dopamine rush. Nice!
Now a slightly different scenario: You have to push up 5 cars.
Doesn't work?
Correct. Neither the muscles nor the intervertebral discs will play along at some point. So the dopamine surge fails to materialize.
What if I told you that this is exactly the problem with cannabis? So you consume cannabis so frequently that you're sort of simulating a 5-car dopamine surge every day.
I'll leave out my medical vocabulary and say: Our dopamine system is not made for this stimulation.
So what? I know when I've had enough!
That's what many alcoholics think, too, yet we have sad new records year after year. If you are interested in my opinion on alcohol and Anheuser-Busch, for example, write it to me in the comments!
At some point, unfortunately, the time is reached when our dopamine system no longer emits shocks and virtually only a void follows. Suddenly, going to the gym becomes so exhausting that you just stay away from it.
But it doesn't stop there: Suddenly the heavy carrying of the bags is too much and one can shower "also tomorrow sometime".
Exactly these are absolute symptoms, which are described more often by young persons concerned.
Source (8) gives an example of such a case, where a student of the 10th grade got these dopamine surges regularly and at some point, however, would become so erratic that he had to repeat the 10th grade. He is not alone in this, as brain maturation in males does not begin until age 25 in terms of dopamine. Unfortunately, the critical first phase of puberty from 12-16 years often overlaps with the exploration of boundaries in the drug sector as well, so that it is precisely at this highly vulnerable time that cannabis use can occur. A period that is rejected by leading physicians for cannabis use (cf. (6), (8)).
Here the strongly increased THC content of 10% plus did the rest. For comparison: At the time of our parents cannabis was at about 2% and was rather less suspected for the above mentioned symptoms (cf. (8)).
It is up to you to decide whether this development is due to the illegality of cannabis or whether other factors may have played a role. Feel free to write your opinion in the comments, but stay objective.
But why is British American Tobacco still betting on the world's oldest medicinal plant?
How might cannabis help in the substitute market?
What is my opinion on BAT and legalization?
All these are topics of the second part. Feel free to write me if you would like to see it.
If you liked the article and are on fire for more dividend stocks, then check out my brand new AT&T video on the lead scandal!
Only 18 more subscribers to the 1,000 mark! Thank you all!
No investment advice
Your Bass-T
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#aktien
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#cannabis
#stockanalysis
Sources
(1) https://de.marketscreener.com/kurs/aktie/BRITISH-AMERICAN-TOBACCO--54264463/
(2) https://seekingalpha.com/article/4617407-british-american-tobacco-value-income-stock
(3) koyfin.com
(4) https://www.marketbeat.com/stocks/NYSE/BTI/short-interest/
(7) https://www.tagesschau.de/inland/gesellschaft/cannabis-clubs-102.html
(8) https://www.medical-tribune.de/medizin-und-forschung/artikel/kiffen-bitte-fruehestens-ab-25
