Marijuana Stocks Remain in a Powerful Uptrend—But How Long can it Last?
Part of the marijuana sector’s strength, of course, is because the broad market is also trending higher. But a substantial part comes from the growing realization, especially in wake of last week’s election that promised us a uniformly Democratic federal government, that this industry will continue to boom as legal barriers are removed.
Fundamentally, this is terrific. It makes me highly confident that this sector will continue to reward—at a higher-than-average rate—over the long term.
However, as all experienced investors know, the company is not necessarily the stock. Stocks can decline even while companies grow. We saw it in this sector big-time in 2019, and we will see it again—though no one knows when. So when the tide does turn, my plan, as previously, is to raise cash by selling partial positions of many of our holdings. Eventually, some of the worst-performing stocks in the portfolio are likely to be sold entirely. But there’s no knowing today which stocks those will be. We just need to keep up with the fundamentals and watch the charts.
Now, I know that many of you are tempted to simply hold these stocks long-term—and I understand the reasoning behind that. That would be a good plan except for one thing: We truly do not know for certain that any one of these companies will continue to grow—and, equally important—to eventually grow earnings.
For example:
Way back in November 2017, Canadian stocks were the industry leaders (as investors bought in anticipation of legal sales) and one of our first investments was Organigram (OGI), bought at 2.68. Eleven months later, when the Canadian legal market officially opened, and the stratospheric climb of these stocks appeared unsustainable, we sold half-positions of all six of our red-hot Canadian stocks, in the process taking a profit of 130% in OGI—at 6.72.
Soon after came the 2019 bear market in the sector, and then the 2020 Covid crash, when we finally sold our last piece of OGI at 1.55, for a loss of 42%. After the crash, of course, most stocks bounced. But OGI kept sinking, as investors in Canadian marijuana stocks migrated to faster-growing U.S. stocks. OGI eventually bottomed at 1.01. Today it’s around 1.60.
But here’s the “surprise” that no one could have foreseen a year or two ago: Organigram is no longer growing! Just this week, the company announced that for the quarter ended November 30 (its fiscal first quarter of 2021), revenues were $25.3 million, down 11% from the year before. Now, the fault is not all OGI’s; there was an oversupply of product in the wholesale markets and the closure of stores due to Covid impacted retail sales. But the simple fact is that OGI is no longer a leader—and someday, some of the stocks in our portfolio today will be in the same boat.
So, try not to get too attached to any of your stocks. Remember the power of trends. Enjoy this one while it lasts, but be prepared to raise some cash when the trend ends.
Turning to our individual stocks, there was only one notable news item this week.
GrowGeneration (GRWG) yesterday preannounced record full-year 2020 revenues of $192 million, up 140%, and raised its preliminary 2021 guidance to $335 million-$350 million. The stock, which had hit a new high Monday, pulled back minimally on the news. GRWG remains the portfolio’s largest holding.
As for the action of the stocks, most notable are the three stocks that hit new highs this morning.
Cresco Labs (CRLBF) has been strong since the start of the year, up in seven of the eight trading days of 2021.
TerrAscend (TRSSF) broke out from a healthy five-week base yesterday to hit new highs and is continuing higher today. As a smaller company, it’s a bit lower profile than the big boys and thus may hold up better in the next correction.
Trulieve (TCNNF) is the strongest of all, hitting new highs every trading day of this year. As I’ve mentioned before, I like the fact that the Florida company (unlike most in the industry) already has a solid track record of earnings growth.
So, looking at our fully-invested portfolio today, I again ask myself whether it’s time to start raising cash. Certainly these stocks are extended. The news is very good. Sentiment is high. Back in 2018, I was lucky to sell half-positions of our six Canadian stocks one day from the top. Doing it again is not my main goal. Trying to pick tops and bottoms is a fool’s game. My goal is to maximize gains on the way up, by holding leaders, and to lose less than the market on the way down by holding substantial amounts of cash.
I think about this every day. And today I’m staying 100% invested.