U.S. marijuana stocks have been on a tear of late. Now Canadian marijuana stocks have joined the rally. How long will it last?
I noticed something funny as I wrote this story: the Marijuana Index year-to-date was exactly the same as its performance through all of 2020—up 29.2%. I checked the formulas, but there was no mistake. In less than one month of 2021, the index has done as well as it did through the entirety of 2020.
What is this information worth? It’s one more reminder that we’re not early in this ballgame. It’s a reminder that someday—it could be today, it could be six months from now—this uptrend will end, the sellers will take charge, and marijuana stocks will fall to their 50-day moving averages, if not farther.
Signs that things are getting frothy, both in the broad market and the marijuana sector, have been numerous. Valuations are high. Investing is more popular among individuals than it has been at any time since the 2000 top, with social media fanning the flames this time. And money has flowed into the marijuana sector in particular, as big investors place their bets in anticipation of eventual federal legalization. (Sadly, money always rushes in at tops, and is pulled out at bottoms.)
The end of marijuana prohibition represents a once-in-a-lifetime opportunity to get in on the ground floor of the fastest growing sector on the planet.
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Canadian Marijuana Stocks Join the Rally – for Now
And this month, the Canadian marijuana stocks have come to life, after underperforming severely in 2020, despite the fact that U.S. legalization will be no help to most of them. One of the attractions to the Canadian stocks today is their greater liquidity, which is partially a function of their legality. But when the U.S. goes legal (I have no opinion on when that will be), I see a risk that institutional money will be pulled out of Canadian marijuana stocks and invested in the bigger U.S. market.
Right now, however, I’m staying fully invested in my Cabot Marijuana Investor advisory. The market as a whole, notwithstanding Wednesday’s weakness, still looks healthy. Plus, as I’ve mentioned before, previous major tops in the marijuana sector have all come when legal sales started: Colorado in early 2014, California in early 2018 and Canada in October 2018.
There’s no guarantee that pattern will hold—but if it does, the beginning of legal sales in New Jersey, the timing of which is still unknown, might bring the next top. Or maybe it was the opening of recreational sales in Arizona last Friday. Time will tell.
What is worth remembering is that after that Canadian peak, marijuana stocks fell for 17 months—so avoiding a major part of the next downturn is a wise strategy.
Last year, by staying invested on the way up and holding cash on the way down, my Cabot Marijuana Investor portfolio gained 85.5% while the Marijuana Index gained the aforementioned 29.2%. This year, we’re lagging the index, in part because we’re underweighted in those Canadians that have popped up this month.
But the year is young, and the odds are good that this year, once again, we will outperform the index, just as we have for the past three years, by following our strategy.
*Editor’s Note: This post was excerpted from the latest issue of Cabot Marijuana Investor.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More