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The Smart Money Is Waiting for Cannabis Stocks to Stabilize

Cannabis stock investing is exciting, sometimes profitable, and never for the faint of heart. For the uninitiated, it probably feels a bit weird to watch an entire sector of stocks move up or down 5% in a single day, but that’s just business as usual in the pot-stock world.

The Smart Money Is Waiting for Cannabis Stocks to Stabilize
Source: Shutterstock

Still, that leaves room for breathtaking upside potential – clearly the allure for prospective riders of the “green wave.”

Between the passage of the Farm Bill (which provided limited decriminalization of hemp), the ousting (whoops, I meant “resignation”) of former anti-weed Attorney General Jeff Sessions, and massive deals with the likes of Altria (NYSE:MO) (which invested $1.8 billion into Cronos Group (NASDAQ:CRON)) and Constellation Brands (NYSE:STZ) (which took an eye-popping $4 billion stake in pot-zilla Canopy Growth (NYSE:CGC)), you’d think that cannabis stocks should be soaring, but they’re not.

Indeed, cannabis stocks are suffering from a protracted Armageddon of sorts, a painful and relentless slump that started in mid-March and has left the sector hurting and seemingly hopeless.

This raises the question of whether it’s an opportunity to go bargain-hunting amid what could be an overreaction – or the justified bloodletting of a bloated market niche.

When the Levee Breaks…

As much as I’m rooting for cannabis stock investors to at least break even on their holdings, it’s hard for me to reconcile an oversupplied market with the pot stock valuations we saw in March of this year… or in September of last year, or December of 2017, for that matter.

The mass exoduses from cannabis stocks can, in hindsight, be seen as the final phase of a hype-and-letdown cycle that draws in the hopeful and forgetful at the worst possible times.

There are even mini-cycles within the bigger cycles now. I can still feel the goosebumps of excitement surrounding what I’ve been calling the “Drake spike” that happened earlier this month: hip-hop superstar and millennial trendsetter Drake partnered with Canopy to fund Toronto-based licensed producer The More Life Growth Co.

I can still see the tall, proud green candlesticks on the chart… the pundits calling for a bottoming process… the hope that springs eternal.

Alas, the hope was far from eternal. The Drake spike was fleeting, lasting for just a single trading day, and preceded more downside for not just CGC stock, but the entirety of the sector (or at least so it seemed). It was a costly reminder that a single day doesn’t negate a long-term bear trend and a celebrity endorsement – even a big name like Drake – can’t set a sinking ship back on course.

… There’s No Place to Hide

The latest wave of hype might have been the Drake bump, but the putative story of the year was supposed to be Cannabis 2.0: Canada giving permission for companies to sell edibles and concentrates.

The October event came and went, but marijuana stock prices didn’t have the anticipated moon shot. Given that markets tend to be efficient and investors knew about Cannabis 2.0 months in advance, it really shouldn’t be so shocking that as usual, the market bought the rumor and sold the news.

And then there’s the aforementioned oversupply issue, which I have yet to see the cannabis market properly address. I’d really like to see companies like Canopy, Aurora (NYSE:ACB), Cronos, and Aphria (NYSE:APHA) work together to slow down the flow of cannabis product, but when I look at these companies’ websites, all I see is a race to be the “top producer” in terms of quantity.

A refocusing away from quantity and onto quality would, in my stupendously humble opinion, benefit the sector in toto as well as the companies’ respective bottom lines.

I only wish that the cannabis company executives saw it this way.

It really bothered me to hear Aurora Chief Corporate Officer Cam Battley placidly say, “I’m not worried about it,” and “We’re completely sanguine of what will happen in that eventuality,” in response to the oversupply question. With investors hemorrhaging money and seeking answers, Battley’s attitude doesn’t exactly inspire confidence in an imminent turnaround.

The Bottom Line on Cannabis Stocks

Waiting for a better time to buy is a challenging exercise in patience, but I believe that patience will reward enterprising cannabis-stock investors.

Panos Mourdoukoutas, Professor of Economics at LIU Post and author of prescient Forbes article Cannabis Stocks Will Make More People Rich Before Diving, duly reminds us of the inverse relationship between today’s hype and tomorrow’s equity valuations: “At this point, these stocks are in a bear market. Buying them is like is like catching a falling knife. I’ll wait until the hype is completely out.”

And, as my father has reminded me of on many an occasion, you won’t lose money by waiting for better prices. Sure, you could lose out on opportunities, but in the case of buying cannabis stock, I’d much rather be late with my entry than holding the bag – which, in this case, is overfilled with unsold product and enough hype to fuel a melt-up that never should have happened in the first place.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/11/smart-money-cannabis-stocks-stabilize/.

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