Are Marijuana Stocks Now Correction-Proof?

Marijuana Stocks Is the Pot Stock Market Correction-Proof
iStock.com/Adam Simpson

Marijuana Correction

The marijuana industry has come a long way in 2019. I sometimes feel like a broken record when I write this, but it bears repeating again and again: the industry has never had a year quite like 2019. Politically and financially, we’re seeing the first true glimpses of the global marijuana market.

And that, in turn, has led to one of the most consistently prosperous times to be a marijuana stock investor. That leads me to my next question: Is there going to be a marijuana downturn in the future? In other words, is a marijuana correction something we should be worried about?

To contextualize that question, you have to look at the history of pot stocks: they have traditionally been very volatile and prone to wild swings, both up and down.

While share prices have grown exponentially in recent years, that growth has not been steady; instead, it has been punctuated by sudden bursts upward followed by prolonged periods of stagnation or even regression.

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Pot stock investors have made a lot of money, but investing at the wrong time has been costly, due to the volatility.

For instance, in October 2017, marijuana stocks were on the rise, seeing impressive gains following a massive deal between Constellation Brands, Inc. (NYSE:STZ) and Canopy Growth Corp (NYSE:CGC). The partnership between Big Alcohol and pot stocks was among the first major deals in the industry and, as a result, it sent shares soaring.

Going into 2018, stocks were on the rise. But then the year turned and the gains slowed.

In fact, 2018 was, for the most part, a weak year for cannabis stocks. That was a direct result of a prolonged correction in the market that resulted from investor concern over volatility.

This volatility, however, may have finally been, if not eliminated, at least mitigated heavily by the legalization of pot in Canada.

With real earnings numbers now available, marijuana stocks are no longer just selling on dreams and potential, but are instead selling on real profits.

We’ve seen a number of pot stocks (some of my favorite ones listed in the chart below) see huge gains as companies release quarterly reports showing hundreds of percentage points of revenue growth as a result of the Canadian marijuana market.

The chart below showcases the recent performance of Canopy Growth Corporation in black, Aurora Cannabis Inc (NYSE:ACB) in blue, Cronos Group Inc (NASDAQ:CRON) in red, Hexo Corp
(NYSEAMERICAN:HEXO) in green, and OrganiGram Holdings Inc (OTCMKTS:OGRMF, CVE:OGI) in pink.

Chart courtesy of StockCharts.com

And to make things even better, this is just the start. Canada plans to legalize marijuana edibles in October, while U.S. politicians have openly flirted with marijuana legalization.

In fact, many of the presidential candidates for the 2020 race in the Democratic Party have made marijuana reform one of the key pillars of their campaigns.

Not to mention that, with the legalization of hemp cultivation in the U.S., cannabidiol has effectively entered every U.S. state, resulting in the first real taste of a nationwide legal cannabis market.

The newfound legitimacy that marijuana has enjoyed in 2019 has, in my mind, been the final push to transform the product from illicit drug to average consumer good.

And with that transformation comes stability that has so far been lacking.

Why Pot Stocks Have Been Soaring

A marijuana correction is not impossible. In fact, it’s almost a certainty. After all, almost every industry has some manner of boom-bust cycle that no economist or analyst can predict.

But—and this is huge—these corrections are likely to be shorter, softer, and less damaging than before. That’s because the cannabis industry is maturing away from being sold on potential to instead being sold on hard numbers, as I explained above.

While individual marijuana stocks are still prone to wild swings based on their financials (something that every company in every industry is subject to), the volatility that was once both a gift and curse for cannabis stocks is now at its lowest rate since I began covering them three years ago.

As seen in the chart above, those stocks are on strong and sustainable upward trends. Instead of seeing huge gains in a matter of days, they are racking up months of sustainable and impressive gains, propelled by the Canadian marijuana market and the growing U.S. market.

The overall effect, then, is that pot stocks are not likely to be crushed by one piece of bad news. While they will still see downturns—and some of those will be painful—they are far less likely to be sent into dark spirals, as was the case in the past.

Marijuana stocks now have what it takes to be true long-term investment options. That’s because, while they aren’t being sold on potential anymore, it doesn’t mean that the potential for growth has totally evaporated.

The Future of Marijuana Stocks

With so many jurisdictions looking to legalize pot, we’ve just scratched the surface in terms of what the weed sector is capable of.

If the U.S. were to federally legalize marijuana in the next few years—a very possible proposition if the Democrats are able to retake the White House and Senate in the next election—then expect to see huge gains from pot stocks across the board.

On top of that, we’ll be seeing far more action in the U.S. cannabis market. The deal between Canopy Growth and Acreage Holdings Inc (OTCMKTS:ACRGF, CSE:ACRG.U) is a prime example of marijuana stocks beginning to have a bigger presence in the U.S.

With the Canopy-Acreage deal, Canopy Growth has gained the right to acquire the largest marijuana company in the U.S. and is, in fact, obligated to do so if marijuana becomes federally legal in the country. Neither company would have engaged in that deal if they didn’t think that American marijuana legalization was on the horizon.

Remember that Acreage Holdings counts among its board members a Canadian former prime minister (Brian Mulroney) and a U.S. former speaker of the House (John Boehner). That amount of political access is truly unique to the large U.S. marijuana company.

That is just a long way of saying that the global marijuana market is on its way—and with it huge growth among cannabis stocks.

Analyst Take

No industry is a sure thing, but the marijuana stock market has proven in 2019 that it has taken yet another step in its evolution. Gone are the days of massive daily price shifts coming on a whim. Instead, we’re seeing a more mature market develop where long-term stability and growth are the words of the day.

While we’ll miss the huge single-day growth that used to be common among pot stocks, we certainly won’t miss the long downtime between peaks and troughs. The new cannabis stock market, then, is one that is more secure but still has huge potential for growth as more countries legalize marijuana and begin sales.