Tomorrow’s the day that stores across Canada begin selling marijuana legally, and as I’ve said several times before, I believe the odds are that this will mark an intermediate-term top for many of the stocks in the sector.
My reasoning is based simply on the knowledge that stocks tend to peak on good news and bottom on bad news.
Marijuana stocks peaked way back in January 2014 after California voted to legalize.
They peaked in January 2018 when California’s legalization became effective.
And I believe the odds are that the sector will peak this month as well—perhaps today but perhaps not for another two weeks.
Now, I could be wrong. The sector could just keep on climbing.
But it’s had a fabulous run in the two months since Constellation Brands made its big investment in Canopy (the sector is up roughly 58%), and with the rest of the market going the other way, my judgment is that this divergence is highly unlikely to last.
Thus, I’ll be taking partial profits in all the portfolio’s Canadian producers today (that’s six stocks) by selling half of each position. I’ll tell you which ones to sell half of, below.
If I’m wrong, that’s OK. The goal of investing is not to be right; the goal of investing is to make money by always understanding the probabilities and putting the odds in your favor.
Below are brief updates on the portfolio’s 12 stocks, followed by further observations—including some buying advice.
Aphria (APHQF 15.8)—APHQF, interestingly, is still below its January high of 20—in part because it’s the last of the big three not to have a big suitor (real or rumored). A normal correction from here could take the stock down to 12.44 or 11.0, while a major correction could take it to 8. SELL HALF.
Aurora Cannabis (ACBFF 12.1)—ACBFF is right at its January high, so there’s natural resistance right here. A normal correction from here could take the stock down to 9.1 or 7.5, while a major correction could take it to 6. SELL HALF.
Canopy Growth (CGC 53.4)—Canopy remains king of the hill, both fundamentally and technically, with its chart well above its January high. Plus, just yesterday it broke out of a consolidation pattern to hit a new high! A normal correction from here could take the stock down to 50, while a major correction could take it to 35—or even 28, almost half today’s value. SELL HALF.
Cronos Group (CRON 11.3)—CRON has a healthy chart, despite the lack of institutional support that the big three have. It’s well above its January high, and it’s been consolidating in a range between 9 and 15. A normal correction from here could take the stock down to 9.8 or 8, while a major correction could take it to 7.2. SELL HALF.
CV Sciences (CVSI 6.1)—The first of the non-Canadian stocks, CVSI has consolidated nicely over the past month. It can be bought on any normal pullback.
HEXO Corp. (HYYDF 6.9)—HYYDF has held up impressively over the past month, but remains vulnerable to a sector correction. A normal correction from here could take the stock down to 6.0, while a major correction could take it to 4.0. SELL HALF.
iAnthus Capital (ITHUF 5.8)—Back in the U.S., ITHUF has made no progress since June, and that’s good—in a way. A normal correction from here could take the stock down to 4.6, while a major correction could take it to 3.8.
Innovative Industrial Properties (IIPR 42.9)—The REIT in the group provides good diversification while still promising growth as the industry booms. And the stock has been hotter than I expected this year! A normal correction from here could take the stock down to 41 (not far), while a major correction could take it to 38—or even 32. Rising interest rates are a wild card here.
KushCo Holdings (KSHB 6.1)—KushCo is another diversification play, and the stock remains below its January high, so it’s not overly extended. A normal correction from here could take the stock down to 5.2, while a major correction could take it to 4.0.
MedMen (MMNFF 6.7)—MMNFF has been hot (with a ton of volume) over the past two days, giving us a 50% profit since our initial buy just two weeks ago. The reason, apparently, is the firm’s acquisition of Chicago-centric PharmaCann, which gives the combined company cannabis licenses in 12 states that would allow it to operate 79 cannabis facilities. It’s hard to say what a normal correction would be so soon after the spike higher. 5.8 would be the minimal correction, with 5.0 or even 4.5 possible.
Organigram (OGRMF 6.3)—OGRMF had been in a classic consolidation pattern since hitting new highs in September, but blasted out to new highs yesterday. A normal correction from here could take the stock down to 6.0, while a major correction could take it to 4.2. SELL HALF.
Turning Point Brands (TPB 40.6)—TPB has outperformed all my expectations over the past year. Most recently, it’s been building a base around 40. A normal correction from here could take the stock down to 39 or 38, while a major correction could take it to 23.
CONCLUSION
I remain long-term bullish on the marijuana sector, and even after the partial sells, am resolved to holding tightly to all the stocks above. If you have big profits and you simply want to sit through any correction, you can do that.
But I’m raising cash here (after these partial sales, the portfolio will be 40% in cash) with the intention of reinvesting it after the next major correction, when I believe many of these stocks will be at lower-risk entry points.
And I will certainly provide specific buying advice at that time.
As for buying now, if you really have your heart set on it, and believe the recent strength can last significantly longer, I suggest that aggressive investors could target CGC and MMNFF, using tight stops to minimize losses, while less aggressive investors could consider ITHUF, CVSI, KSHB and TPB.
The next scheduled issue of Cabot Marijuana Investor will be published October 25, but I will provide further updates if I think it will help.