Why Are Marijuana Stocks Dropping Right Now?

marijuana stock crash
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Why Marijuana Stocks Are Crashing

Here we are, already a quarter of the way through 2018, and legal marijuana stocks still haven’t had the major breakout that cannabis bulls have been waiting for. Since mid-January, many investors have been left asking why marijuana stocks are dropping.

The answer is rather simple: Growth that was too speedy.

The massive run that the industry had in late 2017 saw many prominent marijuana stocks jump by triple-digits, with investors naturally flocking to this frothy market.

But too much of a good thing does exist, and the market corrected itself, believing that these stocks were beginning to grow a little too fast and that the companies were being overvalued.

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What happened next was that most marijuana stocks gave back a good chunk of their gains, while others began to experience moderate success at best in 2018. That isn’t to say all marijuana stocks have suffered this year. There are quite a few marijuana stocks that have thrived, despite the industry-wide downturn.

This leads us to the current, most important question: “What are the best stocks right now?”

Is the Marijuana Market in a Correction?

We’ve established that the first quarter of 2018 represented a market correction for cannabis, but is it still mired in a downturn?

Well, yes and no.

The massive gains followed by similarly dramatic falls are likely to have subsided, but we’ve seen stagnation from a good number of marijuana companies in the past few months, with 2018 still representing a pretty significant drawback for many pot stocks.

The correction is still rearing its ugly head, but we’re not likely to see such drastic falls as the ones we witnessed in January and February. After all, the market was mainly responding to the hundreds of percentage points of gains acquired at the end of 2017.

So, with the companies knocked down from those lofty heights, they are once more settling into valuations that make the market feel more comfortable.

Best Stocks Right Now

With the state of the marijuana market laid out, what can we expect for the remainder of the year?

I foresee a strong end to 2018, maybe even as strong as the end to 2017.

What’s my evidence? Take a look at the following stock chart, which shows 2017 to the present.

Chart courtesy of StockCharts.com

You’ll notice that, for much of 2017, marijuana stocks were pretty static, in that they had pretty reasonable peaks and troughs.

For much of that year, pot stocks never gained more than 50% and never fell more than 25%. While these numbers are fairly large for most industries, in the marijuana sector, those are pretty tame figures.

It wasn’t until the massive run at the end of the year that the marijuana industry really kicked into high gear.

I believe that 2018 is shaping up into a similar pattern.

You see, with Canadian marijuana legalization on the way for this summer, the horizon is bright for a good number of marijuana stocks to see strong growth. After all, this will mark the first time ever that a developed nation has federally legalized marijuana for recreational use.

That means no more complicated legal play like we’re seeing in the U.S. between federal and state law, and no more restrictions on millions of potential customers.

In my mind, there are two very strong plays right now in the marijuana market that investors ought to consider.

The first is Canopy Growth Corp (OTCMKTS:TWMJF, TSE:WEED).

Canopy Growth stock is one of the most stable ones in the marijuana industry, by virtue of the company being the largest player around.

Chart courtesy of StockCharts.com

Canopy often sees massive gains (though those gains are usually a little tempered compared to its smaller, nimbler competitors), but at a reduced risk of equally massive falloffs.

As such, Canopy Growth stock has emerged from the correction earlier and stronger than most marijuana companies.

Over the past month, Canopy’s share price has shot up five percent. Not exactly mind-blowing numbers, but, at a time when many marijuana companies are still in the midst of a downturn, that five percent begins to look more and more appealing.

More importantly, Canopy Growth stock is poised to take advantage of the Canadian marijuana legalization that’s on the horizon. The company has the size and reputation to be one of the go-to suppliers for what many believe will be a green rush following the legalization of recreational weed in Canada.

Not to mention, the company has expanded its reach internationally, establishing footholds in Europe and positioning itself to be a big player in the international marijuana market.

That makes Canopy Growth stock one of my favorite long-term plays. Stability and safety with huge gains is always a possibility.

Another great stock play, if a riskier one, is Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB).

Chart courtesy of StockCharts.com

I like Aurora stock for many of the same reasons I like Canopy Growth: it’s internationally focused, there is strong gain potential with Canadian legal pot, it has made smart business acquisitions of competitors in the lead-up to marijuana legalization, etc.

What makes Aurora stock a riskier bet, however, is the company’s current stock price performance issues. The past month alone has seen ACBFF stock give back almost 20%.

Of course, Aurora stock is still up in comparison to Canopy Growth, due to its massive gains at the end of 2017, but, with the way the wind is blowing right now, it’s likely that Canopy Growth stock will overtake ACBFF stock.

But I still believe that Aurora Cannabis is a strong company with a good chance of reaping strong gains down the line. In fact, the recent fall in value may actually be a good thing for investors.

When the company does eventually hit its bottom and the correction subsides, you will be able to gobble up Aurora stock for a bargain value, right before marijuana legalization in Canada. That could represent one of the bigger swings in the industry.

Where the risk enters is in the judgment of when Aurora stock has bottomed.

I foresee the company facing difficulties throughout spring, but I would estimate that, by mid-spring or early summer, Aurora stock could be in a great position for investors to jump in.

Analyst Take

The legal cannabis industry has been mired in a correction, but that doesn’t mean there aren’t great marijuana stocks to buy, even now.

Whether you’re looking for a more volatile play or a more stable long-term investment, marijuana stocks offer plenty of options to investors, even during downturns.