Pot Stocks Rebound, Then Give It All Back
For investors playing the marijuana market, everyone is watching for the industry-wide correction to abate and be replaced by a rally. If the rally is even half as good as the run-up to 2018, we’re talking massive double-digit gains in the near future. The problem for pot stocks is in determining when that rally is going to take place.
In the past week, major marijuana companies like Canopy Growth Corp (OTCMKTS:TWMJF, TSE:WEED), Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB), and Aphria Inc (OTCMKTS:APHQF, TSE:APH) rose by several percentage points each.
APH stock and ACB stock both jumped nearly 10%, while Canopy stock showed more modest gains.
But just as quickly as those gains came, they evaporated, leaving the share prices down significantly.
All three stocks were down double-digits in the first week of April, with Canopy stock taking the worst hit, with a near 20% fall. Aphria stock fell 12% and Aurora stock fell 15%.
What does this mean for the marijuana industry outlook? There are a couple of key takeaways for investors.
The first takeaway is to beware false rallies. Just because stocks jump upward by five percent or 10% in one day does not mean that the industry slump we’re experiencing is necessarily over.
With investors being particularly cautious after the massive downturn that started in mid-January, which hasn’t let up, what you want to see is prolonged and sustained growth before declaring the slump over.
The issue is that you’re contending with day traders who will see the big daily jumps as opportunities to short or even get out of the stock altogether, taking their winnings and going home. The volatility of the sector makes these types of plays not uncommon.
Chart courtesy of StockCharts.com
What you want as a long-term pot stock investor is steady and consistent gains. You’ll know the slump is over when you start seeing a string of three, four, or five days without those sharp jumps up and down.
The second takeaway, which I’ll discuss below, is to not lose faith in the marijuana industry.
How to Invest During a Pot Stock Downturn
I’ve written before about these companies in depth, in terms of what is the best play for Canopy stock, Aphria stock, and Aurora stock.
But in a more general sense, the fact that these three stocks gave back all that value could be a good thing.
The market is being reactionary right now. The huge gains at the end of 2017 sent share values skyrocketing and led many analysts to label these pot stocks as overvalued. That precipitated the massive fallout in value that we’ve seen so far this year.
The good news is that the correction may very well over-correct, leaving these stocks undervalued when all is said and done. Basically, what we’re seeing is a massive selloff that could result in these stocks being priced at bargain values by the end of it.
To make things even more enticing for investors is that Canadian marijuana legalization is on the horizon.
Canada’s legal marijuana market is currently valued at CA$25.0 billion. When recreational cannabis becomes legal in that country, Canopy, Aphria, and Aurora in particular are positioned be strong beneficiaries, due to a number of provincial government deals to supply marijuana. (Source: “Marijuana Millionaires Ride Canada’s Legalization Wave,” Bloomberg, April 5, 2018.)
If you recall when Nevada legalized marijuana for recreational use last year, the state literally had to declare a state of emergency in order to suspend a law that limits who can ship marijuana. The reason was, of course, that the state’s reefer-mad market could not get enough of the green herb.
While hopefully no states of emergency have to be declared this time, Canada is likely going to see a massive rush to the local weed stores by summer’s end. Marijuana stocks are similarly likely to see big gains as a result.
So, the combination of lower stock prices and the upcoming Canadian marijuana legalization could actually be one of the strongest plays in the marijuana market for some time now.
I do believe that the gains made following legalization will be inflated and lead to another drawback shortly after, but, if you buy low at the right time, I think there’s a strong possibility of seeing 50% gains by year’s end—with the potential for much more than that.
The downturn has yet to subside, but that doesn’t mean you should sulk in the corner and pout as values continue to fall. Instead, watching for the bottom to hit on these still very valuable companies could reap big rewards for savvy investors.
Gobbling up these stocks at bargain prices could lead to huge payoffs, with Canadian marijuana legalization being so close on the horizon.
It’s that old and tired “buy low, sell high” cliché, but, in this case, it’s definitely the best way to play the marijuana market.
Within the downturn, there is still opportunity in the marijuana market. It just takes patience, diligence, and perseverance.