This morning, news that Pfizer (NYSE:PFE) has a successful vaccine is fueling a massive rally in stocks. There is also another catalyst to boot, which is the U.S. election process. Most investors wanted relief on either of these issues and today we got both. Some sectors like cannabis have been eagerly awaiting the election news. It looks like they are getting their wish but now it becomes almost a no-win situation for them. At least in the short term. They have already rallied too much in anticipation of a Biden victory. Case in point, pot stocks caught fire this month to the point of diminishing returns.
On Friday alone, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) and Tilray (NASDAQ:TLRY) spiked 10% and 24%, respectively. This morning’s news is adding to that.
The polls have leaned Biden’s way since the debates started, that’s when cannabis took flight. They’ve rallied 35% in under 30 days. The contention today is that Wall Street has already accounted for most of the upside already. They could potentially fade into next year. This won’t be a knock against the companies, but it’s just normal stock price action. Notice that I didn’t call it a correction or disaster. The point is not to raise extreme alarms. Investors on Wall Street usually price in the future as soon as they find out about it. The technicals on the charts also support it. The minute Biden took the lead in the polls, traders started buying pot stocks.
Cannabis Stocks Will Have Better Legislative Days Ahead
I don’t disagree that there are better legislative days ahead for pot stocks. It’s just that it’s almost all priced in already. By the time the new president takes office there will be a sell the news event. Conversely, let’s assume that President Trump miraculously wins re-election through litigation, then the selling will be even worse. In either case, cannabis stocks could cool off and recent buyers may suffer disappointment.
I am not a bear on the sector, in fact I predicted a few cannabis stock rallies in write ups and videos. But for now, I bet that the easy money is made. From here, the stocks are going into heavy resistance zones. The bulls usually need to gather more steam, so they can to re-mount more efforts to erode overcome the sellers.
Today the three marijuana stocks in focus are:
Pot Stocks to Fade into 2021: Canopy Growth (CGC)
We cannot discuss cannabis investments and not mention Canopy Growth. Consensus is that it’s the crème of the crop. Ever since Constellation Brands (NYSE:STZ) invested $4.5 billion in it, investors dubbed it legit. They are not wrong because in this environment, having a war chest of cash is essential. Management will then have options to tackle the challenges they face.
The cannabis industry is swimming upstream. It is amazing that pot stocks are doing this well. This is an illegal activity in the eyes of the White House. Yet here they are still alive and kicking on Wall Street. I have the utmost respect for the group, so I apologize in advance for having a negative bias today. This is only for a trade, in fact think of it as finding an opportunity to buy a bargain.
It is exciting to see CGC stock approach $26 per share. But if we look left on the chart, we see that it had been there many times in the last few months. They all ended in failures, so now the assumption is that they will fail again. Onus is on the bulls to finally take it out. The biggest test today is the high it hit on Friday. Getting above $25 per share is crucial and would be a good omen for fans. Meanwhile, the proper trade is to wait for it and chase the breakout. The upside target would then be above $32 per share.
My guess is that it will fade again into support so that the bulls can reset and reload with stronger traders. Fast profits like these usually create a batch of weak hands. CGC stock needs stronger conviction to punch through the wall above. The dip if and when it comes will find footing near $18. See? I told you that I am not a hater. Case in point I’ve written about the upside almost exclusively like this in the middle of August.
Aphria (APHA)
Of the three today, APHA stock was the least happy on Friday, up only 0.75%. This morning it’s up 11%, so it’s making up for it a bit. It has had unusual price action lately. Maybe it has caused it to divest from the rest a little. This month it rallied and faded twice each time more than 30%. Unlike the other two, it had two major spikes similar to a third in July. The reaction to its earnings was negative, so investors are clearly confused about it.
They have good reason for this since they also had acquisition news. Management recently announced the acquisition of SweetWater Brewing. This is good news for the future because it looks like the team is planning for future prospects. It is ventures like these that made the cannabis stock so popular in 2018. It’s not the single form or use, but the hundreds of mainstream applications. Blending cannabis to social drinking is one of the most exciting possibilities. Beer and wine will likely have a strong competitive segment from cannabis.
Not every stock is easy to trade, so investing in them might be best. This cohort moves so fast that investors should do their homework and decide to own shares through thick and thin. Ignoring short-term moves is tough on the way up and down. The FOMO is a powerful motivator. This morning I would resist the pop into the $6.5 zone. It was a ledge about a year ago, so it should be resistance into it. There is no incrementally good news from the earnings score card. There’s no tangible sequential revenue growth to justify the rally.
Aurora Cannabis (ACB)
The ACB stock rally on Friday was ridiculous by any measure and it’s up almost as much again today. I don’t need any charts to pass on taking new longs after a stock moves 90% in two mere hours. This is where responsible investors should admit that they’ve missed it if not already long. I am aware of the concept of momentum trading. There the idea is to buy high and sell higher. But this setup leaves a lot of room for failure.
Other than the fact that nothing has changed in the company’s actual operation, it’s pure speculation. The spike brings ACB stock into a major pivot level from 2016 and beyond. The rally from the October low is more than 260% now. It did almost exactly the same thing in May. Back then it announced a split just so it would stay on the board. The operational results have not improved as they have not grown revenues in three quarters. The gross profit has improved this year but August’s was 12% below last year’s same period.
Now it is facing a ton of resistance above on the chart. These are not hard lines in the sand but rather a bunch of smaller ones. Collectively they make up a difficult slog for the bulls. With the absence of actual improvement in the company results, the buyers need to prove themselves again. A far better entry into ACB stock is either on a dip closer to $7 per share, or above $13.
In 2018 when pot stocks burst onto the scene they received a lot of love. Too much, in fact, and the result was a let-down after the honeymoon. Today, I simply want to raise a similar caution flag. Consider it a yellow flag on the beach where investors can wade in but with caution.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
