Cannabis stocks in general tend to move very fast in both directions. This makes them problematic for investors because they rarely offer easy setups. Trading stocks like Aphria (NASDAQ:APHA) and Canopy Growth (NASDAQ:CGC) requires a solid thesis and a lot of skill at reading charts. Investors could do it without the technical know-how, but it’s much harder to time it right. Aphria stock, for example, has had three rallies bigger than 45% in three months. It has retraced two of them completely and the third part way. Clearly whether you’re a trader or an investor you need to have a strong stomach for it.
When pot stocks burst onto the scene in 2018, their valuations were insane. I don’t mean this from the traditional sense of earnings. Their sales expectations were completely out of whack. Since then, they’ve corrected to where they’ve become much more reasonable. The mania over them has died, but not the fan base or the opportunity. APHA will have better days ahead for the patient investors.
Cannabis is still a popular theme, and for good reason. The bullish argument for it is that it has so many potential applications. They have simply begun to scratch the surface. If you think about it, the stuff is not even federally legal in the United States. The fact that more states are coming online makes the federal shift inevitable, however. When it comes back into the media conversations, these stocks will reprice higher once more.
Aphria Stock Valuation Is Now Reasonable
Aphria stock boasts a price-sales ratio of 3.4. This is very little hopium that the bulls expect out of it. It’s is three times cheaper than Facebook (NASDAQ:FB) and over 24 times cheaper than Zoom (NASDAQ:ZM) to offer two absolute examples.
There might be a problem with optics though.
Cannabis stocks have to compete with headlines that are coming from the cloud stocks that are too fantastic. It’s easy for tech to steal the attention when Zoom and Nio (NYSE:NIO) grow sales 350% and 160% respectively. Aphria’s sales growth is impressive year over year, but is not as flashy on a quarterly basis.
To put it simply, they were the hot topic of 2018 and now they are out of the limelight. But therein lies the opportunity. We know that Wall Street likes to trade based on headlines. Once they get their teeth into a prevailing thesis, they chase it to death. The best way to capitalize on this is to find those topics before they become popular. Pot stocks could be the sleeper headline of 2021.
Aphria stock has just rallied off of a solid base above $5 per share. From a trading perspective, it would make better sense to buy it on the next dip. The range is tightening, so there will be a move soon. If investors want to wear their trader hats they should either buy the dip or buy the rip. Meaning if the dip doesn’t come, then it’s surely breaking out soon. The idea is to either buy it above its most recent fail, or buy it on its next bad day. One is a momentum’s trade, the other one is a fundamental one.
You Have to Be in it to Win it
Those who want to own the stock for the long term should just do that. This would fit with the logic I’m suggesting today, and the weekly chart says to do it. There will come a time next year when CNBC will be covering pot stocks every day once again. It looks like we’re getting a new administration that is almost guaranteed to bring up legalization.
Currently the laws don’t allow for much consolidation, so most traditional corporations are not wading into cannabis. Take that away and you open up a giant door for new money.
The explosion of EV stocks proves that money on the sidelines is itching to jump in on a theme. It is logical to expect cannabis to recapture the imagination of buyers sooner rather than later.
Make no mistake about it, it is still a speculative proposition. But public opinion is warming up to the idea. I live in California and the conversation about cannabis even in my house has completely changed. This will propagate and replicate in other states and it all spells upside potential. I bet alcoholic beverages faced a similar path to normalcy.
There are extrinsic factors that could hinder the progress. For example, stocks in general are too hot and are vulnerable to pullbacks. This alone is not a reason to short APHA stock, but it is reason for caution. Taking trades in tranches here makes sense and leaves room to manage risk. CGC is the logical choice for a bet on pot stocks, so splitting bets could be good. But as they say — no risk, no reward. Aphria carries a bit more risk and therefore should have the bigger reward. They will move in tandem for the most part otherwise.
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.