Please ensure Javascript is enabled for purposes of website accessibility

Averaging into Cannabis Stocks

With ongoing state-level developments and marijuana stocks trading at some of their lowest levels ever, there’s a contrarian case for averaging into cannabis stocks.

Marijuana leaf piggy bank averaging into cannabis stocks, saving marijuana stocks

On the first day of legal recreational cannabis sales in Missouri in early February, state-licensed shops sold an enormous amount of cannabis products. They moved more than $5 million worth. That is almost twice as much as first-day sales in Illinois, which has twice as many residents.

Maryland will begin legal recreational-use sales on July 1. Mississippi recently launched medical cannabis sales. Both Pennsylvania and Minnesota are likely to legalize recreational use soon, possibly this year. In Florida, cannabis advocates recently collected enough signatures to move forward to the next step in getting a recreational use referendum on the ballot in 2024.

[text_ad]

Despite this steady drumbeat of really bullish developments at the state level, marijuana stocks trade at their lowest levels ever. Sentiment is terrible. But guess what. That’s extremely bullish in the contrarian sense. I believe patient investors who average into cannabis stocks here will be nicely rewarded.

How dark is the mood around cannabis names? Not even the most excitable cannabis cheerleaders can find any reasons to be bullish, given the drubbing the group has taken since last December when politicians in Washington, D.C. dropped the ball on favorable banking reform. “I don’t plan to talk about legislative stuff anymore,” says one sector commentator. ”It is not worth it to get our hopes up.” That’s pretty negative, which I love to see, as a contrarian. Cannabis investing YouTube channels report viewership is at lows, also a good contrarian sentiment read.

When you see sentiment this low for a group, it signals that it’s time to buy. Cannabis stocks aren’t a day trade. But patient investors who are averaging into the strongest cannabis stocks will be rewarded.

What might turn things around? Cannabis investors need progress at the federal level in two key areas.

They need the federal government to “de-schedule” cannabis down to a lower level under the Controlled Substances Act. Right now, cannabis is a Schedule 1 drug. That puts it in the same class as heroin and above cocaine and meth. Next, cannabis investors need to see progress on key banking reform that would allow financial institutions to get more involved in offering services to cannabis companies.

Both changes have been slow to develop in part because conservative lawmakers at the national level are hesitant to go along. That may change. Rep. Nancy Mace (R-SC), an up-and-coming star in the Republican Party, has adopted cannabis reform as an issue. She recognizes this is a way for conservatives to steal votes from the left, and she is trying to convince fellow conservatives that this is the case.

My take is that in the worst-case scenario, we won’t get bullish federal-level news on the group until the 2024 elections heat up (September-October). That’s when it will serve the Democrats in Washington, D.C. to drop hints of enticing developments to win votes, as they did last October. But there will continue to be plenty of bullish state-level news along the way.

“I like to buy when there is blood in the street,” says the chairman of one of the biggest companies in the cannabis sector about averaging into cannabis stocks. “Use the volatility to your favor,” says the executive, who also has decades worth of investing experience. “When things like this happen and I start seeing such dislocation where assets are so mispriced, I step in slowly every day, and I buy, I buy, I buy in small quantities. I start to average, average, average. I have always gotten paid for doing that. Unfortunately, retail investors do the opposite. They buy the momentum rallies and they sell the dips. That is a real shame.”

Don’t make that mistake. Given the sharp cannabis stock declines and the rise in interest rates, it’s going to be tough for the weaker players to survive. They have effectively lost access to cheap capital. A few will get bought out by the stronger players in the sector. For more detail on who those stronger players are, come join us at Cabot SX Cannabis Advisor.

[author_ad]

Michael Brush is an award-winning Manhattan-based financial writer who writes a stock market column for MarketWatch. He is editor of Brush Up on Stocks, an investment newsletter. Brush previously covered the stock market, business and economics for the New York Times, the Economist Group, MSN Money, and Money magazine.