A Little More Cautious
From time to time, a reader will ask, “I own XYZ, but I’m getting worried because the stock is so high, and I own a lot and I don’t want to lose my profit.” Unspoken, of course, is the hope that the stock will go higher. We’ve all been there.
My typical answer goes something like this: “If you’re worried, sell some, maybe 20%. Then wait a while, maybe a few weeks. If the decision looks smart from that perspective and you’re still worried about the downside, sell some more. If not, keep on holding.”
I bring this up today because three weeks ago, when the marijuana sector seemed extremely extended to the upside, we sold 25% of each of the positions in our four U.S. multi-state operators—Cresco Labs (CRLBF), Curaleaf (CURLF), Green Thumb (GTBIF) and Trulieve (TCNNF). (They were our biggest positions and I was worried about the downside risk). The very next day, the sector topped out. And today, all four of those stocks are lower than when we sold them.
Thus, according to the guidelines I give my readers, I should sell some more (if I’m still worried about the downside risk).
Well, I am worried about the downside risk, and here’s why.
1. The broad market is now very extended to the upside.
2. The Nasdaq in particular is way out of trend, thanks to a handful of famous technology stocks that are viewed as all-powerful and unstoppable. And history tells me that the point of peak perception for anything (a stock, a company, a movement, an idea) is the point at which the trend reverses.
3. Last week’s stock splits of Apple and Tesla were high-profile signs of the high perception that both consumers and investors have of those companies.
4. The good news is out, in the form of terrific second-quarter reports that were very good for both the stars of the internet (look at Zoom (ZM)!) and marijuana stocks (the average growth rate revenue for our four U.S. marijuana companies, compared to the year before, was 159%!).
5. It’s September, which is traditionally the time that the market begins to cool off—though it is by no means guaranteed.
On the other hand, Cabot’s main market-timing indicators tell us the market’s main trend is up. If you want to keep it simple, holding is still the answer.
But I’m trying to maximize returns (and minimize losses), and it looks to me as if the marijuana sector needs to go through a deeper cooling-off phase before the long-term uptrend can be resumed. So I think it’s time for a little more selling. Ideally, we’ll not only avoid some losses, we’ll be able to buy back in when both stocks and investor sentiment are lower.
Thus, we’re now going to sell an additional third of each of these stocks: Cresco Labs (CRLBF), Grow Generation (GRWG) and Trulieve (TCNNF). CRLBF and TCNNF have weaker charts than the other two multi-state operators (which I’ll stick with for now), and GRWG, the hydroponics supplier, which has bounced nicely over the past week, looks like it needs to pull back some more—and it remains our biggest position, so it could do with some trimming.
After these actions, the portfolio will be roughly 32% in cash, insulated a bit more from short-term downside, but still focused on reaping big profits in the long term as this industry booms.