Marijuana Downturn: Is May the Time for a Marijuana Stock Recovery?

marijuana stocks in may
iStock.com/statu-nascendi

Marijuana Downturn in April

This year continues to be a difficult one for marijuana stocks; a good number of pot stocks have languished in correction mode for months now.

During the current marijuana downturn, we have been waiting for a breakout. April provided a short tease of one about halfway through the month, only to see marijuana stock prices collapse again.

So, what does that mean for May? Is the marijuana recovery finally going to hit this month?

I wouldn’t bet on it. But that may not be such a bad thing.

Advertisement

Let’s first cover why last month held so much potential, only to let pot stock investors down.

Pot Stock Investing in April

At the outset of April, the year was pretty much business as usual.

Stocks were either static or falling, with a few showing promise in fits and starts. Very few pot stocks were able to show sustained gains.

That all seemed to be changing, however, when some huge news broke out of the United States.

The first bit of news was President Donald Trump coming out in support of states’ rights on marijuana legislation.

“Since the campaign, President Trump has consistently supported states’ rights to decide for themselves how best to approach marijuana,” said Senator Cory Gardner (R-CO) in a statement. (Source: “Gardner Protects Colorado’s Legal Marijuana Industry,” Cory Gardner United States Senator for Colorado, April 13, 2018.)

“…I received a commitment from the President that the Department of Justice’s rescission of the Cole memo will not impact Colorado’s legal marijuana industry,” added Gardner. “Furthermore, President Trump has assured me that he will support a federalism-based legislative solution to fix this states’ rights issue once and for all.”

This was a huge shift in the discussion on pot in the United States. Before Gardner’s statement, many had assumed that Trump backed Attorney General Jeff Sessions, who is a known drug crusader and a fierce opponent to legalized marijuana.

The news was unexpected and sent pot stocks soaring in the immediate aftermath.

This was followed by even more positive news, with former Speaker of the House John Boehner pulling an about-face and coming out in support of the marijuana industry.

Boehner had spent much of his political career challenging marijuana and pushing a tough-on-drugs agenda.

With both Trump and the old-guard Boehner supporting marijuana legislation in the U.S. in one form or another, pot stocks were dealt a nice present and their values shot up.

This was especially welcome, considering that much of 2018 had been tough for pot stocks.

And the cherry on top came by way of Chuck Schumer (D-NY), who—on 4/20, no less—came out in support of removing marijuana from the Controlled Substances Act.

While marijuana is currently classified alongside heroin and other deadly drugs as a Schedule 1 drug in federal law, Schumer’s intention to remove the drug from that distinction represents the biggest political support that cannabis has ever received.

You see, Schumer is the Senate minority leader. As such, he has massive influence on the Democratic Party and his fellow members in the Senate.

If Schumer were to put his full political weight behind reclassifying marijuana—and the Democrats are able to score major victories in the mid-term elections—we’ll likely see a marijuana bill on the federal level with a real chance of passing.

Of course, this bill will not legalize marijuana, but it will put the U.S. on a path toward legalization.

So that all explains why April was such a strong month for marijuana stocks—at least in short bursts.

I wrote earlier that those claiming that the correction was over were being premature and that the political bump would likely fade before a full-on recovery set in.

Unfortunately, I was right.

The marijuana market received a shot in the arm from these political victories. In fact, it is now more likely than ever that the U.S. will legalize marijuana in the near future.

But that future is still far enough away that the present correction and perceived overvaluations are still driving down share prices.

While I still firmly believe that a marijuana stock recovery is on its way, my earlier predictions are most likely to prove correct; the marijuana recovery will most likely begin reviving pot stocks in the summer.

That’s because the hype around Canadian marijuana legalization will surely be a huge factor in boosting stock values the closer we get to that date.

With the current Canadian marijuana legalization date set for some time in late summer/early fall, I would expect a full recovery to have taken place by then, with stocks soaring in anticipation of the legal weed frenzy to follow Canada’s foray into regulated recreational pot.

I also said earlier that it may actually be good news that we haven’t hit the recovery yet. And that’s because it means marijuana stocks are still on the lower end of their true values—or at least, their true potential values.

With pot stocks hitting lows in 2018, investors with capital are in a prime position to take advantage of these discount prices.

While some marijuana stocks are more likely than others to see strong gains from this recovery, the industry as a whole right now is trading at prices you will not see for a long while after they’re gone.

You see, when the marijuana recovery does land, I expect many of these stocks to hit all-time highs, making these lower prices a perfect opportunity for investors to buy in while the chips are down.

Winners and Losers in April: MedReleaf Stock and Cronos Stock

While April was a volatile time for many players in the marijuana stock market, I’ve identified two pot stocks that I think best illustrate the ups and downs of the month.

The funny thing about Cronos Group Inc. (NASDAQ:CRON) and MedReleaf Corp (OTCMKTS:MEDFF, TSE:LEAF) is that they very much represent opposites in April.

CRON stock was able to leap out to a strong performance on the back of the aforementioned political boost.

By being the only pure-play marijuana company listed on the Nasdaq, American investors were more likely to trust the company and, therefore, they viewed it as a viable target for investment.

Chart courtesy of StockCharts.com

This makes sense, since many investors would prefer not to brave the over-the-counter (OTC) markets or unknown Canadian stock exchanges.

Unfortunately, Cronos stock got a little bit too much attention and began to grow at a pace that outstripped its true valuation, leaving some analysts to consider the stock price to be overvalued. That led to the pullback in April and the eventual decline that we saw.

While the roughly eight percent fall in April is hardly the biggest drop in the marijuana market, it is significant in that CRON stock was riding so high at one point during the month that its eventual fall was all the harder to swallow.

MedReleaf stock, on the other hand, had a tough beginning of the month.

Its international play in Germany ended up being a flop in terms of immediate stock price growth. But, as I wrote a few weeks ago, investors should not sleep on MedReleaf stock, which had been making strong deals and seemed poised for a recovery, even if the European move didn’t spark the kind of rush it had intended.

What ended up happening to MedReleaf stock in April was impressive, with a 30% run to close out the month.

This makes MedReleaf one of the strongest performers in April 2018 among marijuana companies.

Chart courtesy of StockCharts.com

The two companies were perfect examples of the volatility and unpredictability of April.

While Cronos stock came out the gate hot, it was MedReleaf which ended up seeming to be the stronger of the two stocks at the end of the month.

Considering that CRON stock also took a recent hit in the marijuana news due to its quarterly report, leading some to believe that the company is overvalued, it seems that May is shaping up to favor MedReleaf stock as well, at least early on.

But of course, that doesn’t mean the trend will hold, as April showed us.

Analyst Take

While the overall mood in the marijuana market is dour at the moment, there is still much potential for investors looking to make bold plays.

Many marijuana stocks are down, but I don’t see this as a permanent affliction.

There will be a marijuana recovery; the only question in my mind is “when?”

While the strong political news in the U.S. was a boon in April, it wasn’t enough to jumpstart the industry.

This summer, Canada’s marijuana legalization will be enough, however. As such, I believe that big things lie ahead for pot stocks in 2018.

MedReleaf stock is the perfect example.

When the company’s international deal went through but was unable to move the stock value up, I said that there was still a lot to like about the company and that buying low at the time would have been a good move.

I was proven right as MedReleaf had a fantastic April, with investors buying at that time gaining about 30% in value over the month.

It just goes to show that even when things seem bleak, there is still money to be made on the marijuana stock market.