A three-year chart of the marijuana stock index doesn’t paint a pretty picture. Here’s how to beat the index - by a lot.
Last week I received a fairly skeptical email from a new subscriber to my Cabot Marijuana Investor advisory. He asked, in a nutshell, whether the names of the best companies in the marijuana stock index were becoming too obvious.
Here’s an excerpt of what he wrote:
“I’m not sure maintaining the relationship based on your recommendations is notably worth continuing with the trial. I belonged to Cabot over 25 years ago when you were recommending Ballard Power Systems at probably around a dollar.
“I’m not seeing that here with the marijuana sector. Everybody seems to know the plays and I was hoping by subscribing I would see something different. I feel as though the sector is still too volatile to go deep, however I maintain a lot of positions in ETFs.
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“(Can you) give me some insights as to how you are going to be unique in choosing the stocks here compared to me doing my own research or just following what is always just such big news in the industry?”
In my response, I agreed with the reader. The names of the leading marijuana companies are no secret. You can buy the bigger ones or you can buy the smaller ones, or you can even buy an ETF. But there are no hidden values, and there’s no new technology being developed that is likely to enable an upstart to leapfrog an established player. Where I add value, above all, is in market timing, specifically, in getting my readers at least partially into cash when the sector is trending down. With ETFs in particular, market timing is very critical.
The Up-and-Down Marijuana Stock Index
Take a look at this 3-year chart of the Marijuana Stock Index.
Over the past three years, the index has actually lost ground, even while the industry—particularly in the U.S.—has boomed. If you separate the U.S. stocks from the Canadian stocks, which peaked in late 2018 as Canada legalized, you’ll see that the U.S. stocks have done somewhat better than the Canadians (over three years the U.S. stocks are up a total of 14.5%), but that’s still a terrible three-year return for a sector that’s growing as fast as this one.
My Portfolio Results
By comparison, here are the returns of my portfolio, which started in August 2017 (when the young sector was red-hot).
| Cabot | Index | |
| 2017 | 120.9% | 151.5% |
| 2018 | 15.1% | -23.9% |
| 2019 | -13.5% | -42.2% |
| 2020 | 85.5% | 29.2% |
| Cumulative | 308.0% | 43.1% |
And that’s not counting this year, where we have a good profit while the index is in the red.
The main reason for the difference? Market timing, or more specifically, losing less on the way down.
Interestingly, most investors don’t pay much attention to market timing. Instead, they want the names of high-potential stocks. (I’ve been in this business for 35 years and that’s the way it’s always been). And some investors, like the subscriber above, are particularly keen to find low-priced stocks. But in this sector, there are no undiscovered stocks; in fact, with the consolidation that’s been going on in the marijuana industry, there are fewer stocks all the time.
So, like many of the ETFs focusing on marijuana stocks, I own core positions in the leading stocks of the industry. But unlike ETFs, I’ve been able to take partial profits very near the sector’s major peaks, and to hold substantial amounts of cash until the downtrends have run their course.
This year, the portfolio went from fully invested to 45% cash on February 10 as the stocks were peaking in an unsustainable parabolic rise. Further selling took our cash level up to 64% before I started buying on April 15. Since then, the sector has been building a choppy sort of bottom, and our cash level is now down to 16%, as the portfolio is primed for the resumption of the uptrend.
Last week saw two big days for the sector, days when all of our stocks were up, and that was very encouraging. But we haven’t seen a true follow-through yet.
The one-year chart of the Marijuana Index shows the sector still falling, but the U.S. component of the index has actually been basing since then end of March. Odds are very good that the next major move is up.
If you want help timing the next up move - and picking which cannabis stocks to buy - you can become a Cabot Marijuana Investor by clicking here.
Do you own any marijuana stocks? Which ones?
*Editor’s Note: This post was excerpted from a recent issue of Cabot Marijuana Investor.
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