Cannabis Stocks Have Been in a Downward Spiral. Here’s Why It’s a Buying Opportunity
It’s been rather frustrating to see cannabis stocks falling day after day, week after week, while the companies’ quarterly reports (with the exception of Canopy Growth (CGC)) continue to reveal that business is booming. But that’s how the market works.
First, cannabis stocks attracted a slew of new investors with an early-year boom that saw the sector gain 50% in four months—bringing in the most investors right at the top. And then, as first the cannabis sector and then the broad market rolled over, it gradually persuaded those investors to sell, at a loss, at increasingly lower prices. But somewhere, just as if it seems this downtrend will never end, and you really should give up and put all your money in T-bills (which yield basically nothing!), the sellers will be done and the buyers will take control again, sending the stocks on a renewed uptrend.
Marijuana Index
In fact, it’s quite possible that yesterday was the bottom for the sector. And for those of our stocks that bottomed earlier—say, back in July—the lows of this week look like a fine buying opportunity. You’ll find some buying recommendations in the individual stock updates. But first, a few news items.
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News Affecting Cannabis Stocks
Today, both Ontario and Quebec—Canada’s two most populous provinces—have one marijuana store for every 595,000 and 495,000 people, respectively, while in Colorado, there’s one store for every 10,000 people. In Colorado, that might be too many stores, but in Canada there’s definitely a need for many, many more. Also in Canada, edibles and vapes will become legal on October 17, one year after flower became legal, and products will hit the shelves two months later. Experts are predicting shortages, echoing the shortages of flower in the first year, but overall, it will be one more step on the long path to growth.
Meanwhile, in the U.S., the march toward nationwide legalization continues, with encouraging news from Minnesota, Ohio, and Alaska. And in the 36 states where medical marijuana is available, the fastest growth is coming from Oklahoma, Florida, Ohio and Illinois (all states where adult-use is still illegal).
Our Marijuana Investing Strategy
Our strategy is twofold.
One, we want to own the stocks that are likely to be the leaders of this industry five and 10 years from now, because long-term investing is where the big money is made. Two, we want to make money in the short term, by overweighting our investments in strong stocks and underweighting our investments in stocks that are weak—and holding cash when appropriate.
Sometimes this means selling at peaks and taking short-term profits—which can be fun. And sometimes it means selling and taking short-term losses—which is never fun. But one of the cardinal rules of growth stock investing is that you must cut losses short, so that you can have cash to redeploy into stronger stocks. A corollary of this is that we never average down; instead we average up, rewarding success.
Additionally, diversification is mandatory. Any one stock can go wrong; but if you invest in enough of these cannabis stocks, the long-term trend of the industry is guaranteed to reward you. Recently, for example, Canadian marijuana stocks have been generally weak, both because they were strongest earlier this year and because Canopy Growth’s results put a damper on the sector. But U.S. marijuana stocks and CBD stocks have held up better, as money sloshes around in the sector, positioning for the next big uptrend.
Note: This post was excerpted from the latest issue of Cabot Marijuana Investor. To learn how to subscriber, click here.
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