Several readers have asked about what effect tomorrow’s election might have on marijuana stocks, in part because four states have measures on the ballot that would increase legality. Michigan and North Dakota are voting to legalize recreational marijuana for adult use; in Missouri, there are three initiatives about legalizing marijuana for medical use; and voters in Utah will also vote on medical marijuana.
I haven’t studied each state’s ballot, and feel no need to. The main trend is quite clear—federal legalization is coming. In fact, there’s a chance that if the mid-term elections go his way, President Trump might then get behind a move to legalize marijuana as a pro-business move. Then again, that may be overly optimistic.
In any case, it’s worth remembering that all the facts and hopes and fears are reflected in the action of the stocks, so below you will find analyses of each stock in the portfolio—but first, a refresher on strategy.
1. The marijuana industry is the fastest-growing industry in America, so the long-term trend of marijuana stocks is up. My goal is to get you invested in the long-term winners early, so you will have some very hefty profits five and 10 years from now.
2. The major trend of the stock market is now down, technically, which means extra caution should be exercised in all sectors.
3. A short-term top for marijuana stocks occurred on October 16, the day before Canadian legalization.
4. The marijuana sector may have bottomed in the past week or two, along with the broad market, but only time will tell. Certainly the broad market is due for a bounce, but the marijuana sector, having been the last sector to capitulate, may need extra time to wash out the weak hands.
5. Diversification remains a key strategy for investing in the sector, so I continue to recommend that you own not just Canadian growers but U.S. companies and companies serving other sectors of the industry. (I’m still looking for a marijuana banker.)
6. Last but not least, I continue to believe that you can increase your profits and reduce your risk—particularly while the sector is still volatile—by selling when marijuana stocks are high and buying back in (or buying better stocks) when marijuana stocks are low. (I recommended taking profits in all the Canadian growers on October 16, and as a result, the portfolio is currently 43% in cash and up 55% YTD.)
What to Do Now
Tomorrow, I will sell a third of our position in MMNFF, because it has grown overweight, and I will reinvest some of our cash in HYYDF and OGRMF. Details below.
Aphria (APHA 12) Now trading on the NYSE under a new symbol, APHA looks typical of the big Canadian growers, with a peak in early September and a bottom early last week. It has not corrected to as low as I said it might (8), and 10 looks like a decent entry point now.
Aurora Cannabis (ACB 7.0) ACB peaked in mid-October, the day before Canada’s legalization, and bottomed last week, slightly below where I suggested it might (6). A retest is due, and if it holds above 6, that would be encouraging.
Canopy Growth (CGC 37) Canopy is the investment of choice among institutions, not least because Constellation Brands’ big investment virtually guarantees long-term success. But that doesn’t mean the stock can’t have a correction! CGC peaked the day before Canadian legalization and bottomed last week at 32, just above its 200-day moving average. The correction almost certainly has longer to run, but if you’re just getting started in the sector, you could nibble on pullbacks toward 31.
Cronos Group (CRON 7.9) Cronos is another of the Canadian majors, and it’s volatile! I previously told you a correction could take it down to 7.2, and it actually hit 6.5 last week before rebounding. The correction will almost certainly take longer to play out, but aggressive investors can try to buy low on moves back toward 7.0.
CV Sciences (CVSI 6.2) Not a marijuana business but a cannabidiol (CBD) oil business, this stock has avoided the big correction—in part because public perception of CBD continues to improve. In fact, technically, it’s still in the basing pattern that began in early September. I last told you that the stock could be bought on any normal pullback, and that’s worked out well—and still applies. Third-quarter results will be released Wednesday.
HEXO Corp. (HYYDF 4.8) Previously known as Hydropothecary, HEXO is a Canadian major, so its stock has followed the same pattern as the others. I previously said that a major correction could take it to 4.0, and in fact the stock did bottom at 3.7. If you don’t own it yet, you could nibble on dips toward 4.0. The portfolio previously took profits, selling half its position at $6.72 on October 16, and now will buy back in, using 6% of the portfolio’s cash.
iAnthus Capital (ITHUF 5.7) As a U.S.-based multi-state, vertically integrated operator, ITHUF has been somewhat insulated from the volatility of the Canadian growers, and has the potential to be a major U.S. player years from now. I last told you that a major correction could take it to 3.8—and the stock did touch 4.2 last week before rebounding very strongly. If you own it and you’re overweighted, you could take some profits here. If don’t own it, try to buy below 5.
Innovative Industrial Properties (IIPR 41) Innovative Industrial Properties is a real estate investment trust (REIT) dedicated to the cannabis industry, and the stock has been rock-solid in recent weeks. If you don’t own it, and your portfolio could benefit from the diversification and relative stability, you could buy here.
KushCo Holdings (KSHB 6.0) Another U.S. peripheral player, KushCo supports the marijuana industry by dealing in totally legal goods and services on a national level. I previously told you that a major correction could take it to 4.0, and the stock did hit 4.4 two weeks ago before rebounding strongly. Traders could take a little profit on this strength.
MedMen (MMNFF 5.9) MedMen is a competitor of iAnthus, and its stock has been a bit stronger, thanks in part to an acquisition in mid-October that increases the chances that the MedMen name may become the most visible name in U.S. cannabis retailing. But short-term, it looks a bit overextended. Traders could take a little profit on this strength, while new buyers could try to get in under 5 if the chance comes. The portfolio will sell a third of its position tomorrow to reduce what has become an overweight position.
Organigram (OGRMF 4.5) Another Canadian major, OrganiGram has followed the pattern of the group, peaking the day before Canadian legalization and bottoming two weeks ago. I previously told you that a major correction could take it to 4.2—and in fact it got to 3.8 two weeks ago. There’s still potential for the stock to retrace to that level, but selling pressures are far lighter now, so buying on a retreat toward 4 is attractive. The portfolio previously took profits, selling half its position on October 16 at 6.15, and now will buy back in, using 6% of the portfolio’s cash.
Turning Point Brands (TPB 42) Turning Point is the old-school smokeless tobacco company that has been expanding into the cannabis and vaping markets, primarily through acquisitions of the Zig-Zag brand and several vaping brands, including Vapor Shark, Vapor Beast and International Vapor Group. And the stock has been trading solid as a rock in the 41 region for the past two months, buoyed by the unusual combination of the traditional defensive sector (tobacco) and the continent’s fastest-growing industry (cannabis). If you don’t own it, you could buy here. However, technically, I still see the potential for a correction to 34.