A few days ago I received the following email.
Hi Tim. Interested in medical and recreational marijuana stock. I’ve never dabbled in stock before. Wondering what you can tell me. Thanks Eddie
Well, what I told Eddie is this:
Eddie,
“The marijuana sector is hot, and thus a high-risk place for beginners to start. Of course, the potential rewards are high, too, in the long run, but I do want to emphasize that it’s very easy to lose money in these stocks, particularly if you buy high and then sell in panic when your stock drops. However, if you start slowly, read all you can on our website about investing, and subscribe to Cabot Marijuana Investor, I believe I can help you win in the long run.”
Good luck,
Tim
I have to say, Eddie’s letter worries me.
It worries me because it reminds me of the way amateur investors came out of the woodwork near the dot-com market peak in 2000.
It worries me because marijuana stocks are already up 43% this year (our portfolio is up 47%), and it seems that most investors expect that trend to simply continue.
And it worries me because he uses the word “dabbled.”
And I don’t recommend dabbling in stocks any more than I recommend dabbling in medicine or dentistry.
So this letter, which does include some updates on our portfolio stocks farther down, is mainly a reminder to you to exercise some caution.
While the long-term prospects for this industry remain very bright, and I’m thrilled to be your guide to these opportunities, the short-term risks are now high. Which means that someday, there will be a correction, and some investors, particularly those who bought at the top, will lose a lot of money. And I don’t want you to be one of them.
So, if you’re a newcomer to the sector, take your time. Don’t do all your buying in one day. Buy one or two stocks, then wait. When you have some profits, do some more buying.
Always try to buy on corrections—or on high-volume breakouts to new highs.
Diversify, always, because surprises happen frequently.
Beware of the lowest-priced stocks; they can be particularly volatile.
And always know what your risk is in every position. I recommend looking at moving averages as well as previous levels of support to judge what level a stock might fall to, and if you don’t relish the thought of your stock falling to that level, make sure you sell before that. Taking a loss is not a crime; holding a loser while the loss grows even larger is.
Lastly, I hope I’m wrong about the risk and I hope this sector keeps on charging ahead, reflecting the rapid growth so many of these companies are enjoying. But the market is a two-way street, and my conscience tells me it’s important to give you this warning now.
What To Do Now
Remain heavily invested, but keep an eye on your risk level. In the portfolio we will now average up in Elixinol (ELLXF), our smallest position, doubling the size of the position.
Updates
Aphria (APHA 10) APHA continues to build a base around 10. New investors can buy some here. The portfolio averaged up last week.
Aurora Cannabis (ACB 9.6) ACB surged for a week on the news that the company had appointed Nelson Peltz as a Strategic Advisor, and now it’s very close to its highs of 2018—which represent resistance. If you’ve got it and you’re overweighted, you could lighten up here, though the long-term prospects are now brighter than ever.
Canopy Growth (CGC 47) Industry leader CGC is similarly close to last year’s high, so not an attractive buy but a solid hold. The portfolio averaged up last week.
Cresco Labs (CRLBF 9.5) One of the up-and-coming vertically integrated multi-state operators (MSOs) in the U.S., this is still the most thinly traded stock in the portfolio, but the action of the stock is impressive. If you don’t own it, look to buy on a pullback, perhaps to 8.5. On Monday the company announced that it would acquire VidaCann, one of the largest providers of medical cannabis in Florida.
Cronos Group (CRON 21) CRON has been building a nice base centered on 22 since the start of February, so buying anywhere under that level is attractive. But Cronos will report earnings on March 26, so sparks—or mud—could fly. The portfolio averaged up last week.
Curaleaf Holdings (CURLF 6.8) Curaleaf on Monday announced a plan to acquire Acres Cannabis, which operates the largest marijuana cultivation facility in Nevada, as well as a production and extraction lab and a cannabis dispensary located in Las Vegas, adjacent to the Strip. Curaleaf now claims that it’s the leading vertically integrated multi-state cannabis operator in the U.S.—but it’s hard to know, because the landscape is changing so rapidly, and it depends what you measure. In any event, the stock looks like a decent buy, especially under 6.5.
Elixinol (ELLXF 2.7) The most bullish thing a stock can do is hit new highs and that’s what ELLXF has done both yesterday and today. Elixinol is one of the CBD companies that are competing in an increasingly crowded field, and this feat will attract more investors to the stock. The portfolio will now buy more, doubling its current position.
Green Thumb Industries (GTBIF 14) Our newest addition, GTBIF bounced off a low at 12 two weeks ago and is working to get to 15, where it ran out of gas in January. Buying below 13 would be ideal, but if you can’t wait you can nibble here.
HEXO Corp. (HEXO 6.7) HEXO reported fourth-quarter results last week. Revenue grew in excess of 13x to $16.2 million, which was up 143% sequentially from the previous quarter. Medicinal revenues grew just 17%. And oil sales represented 23% of the adult-use revenues. That report plus the announcement of the acquisition Newstrike Brands attracted a lot of investors over the past week, but the stock peaked yesterday and now is likely to cool off for a while. If you’re overweight in the stock, you could consider taking some profits here. We’re underweight, so will just sit tight.
iAnthus Capital (ITHUF 5.4) iAnthus is a multi-state operator with a focus on the heavily populated East Coast. The portfolio averaged up last week, and if you’d like, you can buy here, though below 5.2 would be better.
Innovative Industrial Properties (IIPR 89) IIPR continues to amaze me; the REIT is up almost 100% since the start of the year! And last week the company announced fourth-quarter results. Rental revenues were approximately $4.7 million in the quarter, up 111% from the prior year’s quarter. IIP paid its seventh consecutive quarterly dividend of $0.35 per share, representing a 40% increase from the prior year’s quarter. And then the company announced that subsequent dividends would be $0.45 per share, which is an 80% increase from IIP’s first-quarter 2018 common stock dividend. The stock looks really extended here, so I don’t recommend buying it—and if you’re overweight, you could take profits. I’ll hold.
KushCo Holdings (KSHB 5.6) KushCo is still trading sideways (from a long-term perspective) and I still like the idea of buying around 5.6, especially if your portfolio would like the diversification provided by a U.S. company that deals with totally legal ancillaries to the marijuana industry.
Organigram (OGRMF 7.0) OGRMF hit a new high today (just barely), so I’m tempted to average up, but I just did that last week, so I’ll stand pat.
Turning Point Brands (TPB 47) The portfolio also averaged up on TPB last week, when the stock hit new highs on multiple days. The trend remains strong, in part because I believe the stock is still being discovered by investors wanting safe and legal exposure to the marijuana industry. But the stock could easily correct to 42 in a weak environment.
That’s all for today. Coming in next week’s issue will be some new stocks to keep an eye on!