I’ve warned investors that making money in marijuana stocks is not as simple as loading up when the news is good. That’s because bad news is sure to follow.
Today was a prime example in the stock market.
A lucrative industry does not mean that every company is a good investment. And even when a company is good, it does not mean that the stock is appropriately priced. In addition, marijuana stocks in particular are vulnerable to unsustainable valuations, sentiment shifts, high volatility, short squeezes, and “pump and dump” schemes.
At this time, the last thing marijuana stock investors needed was a punch in the gut, but they got one anyway.
Let’s explore what happened today with the help of a chart.
Note the following:
• The chart shows the zone that represents the price paid for Tilray’s stock by a large number of investors who are still holding the stock.
• The chart shows that, on average, a typical investor appears to have lost about 75% of her investment.
• The chart shows the Arora signal to short-sell or sell Tilray as high as $280. The profits on the last tranche have been taken as low as $24. In short-selling, money is made when a stock falls.
• The latest downturn in marijuana stocks is in response to an announcement by marijuana company Hexo Corp. HEXO, -22.55%. Hexo said fourth-quarter net revenue will be about $14.5 million to $16.5 million, and net revenue for the year will be about $46.5 million to $48.5 million. Both numbers are disappointing and below consensus estimates.
• Hexo withdrew its fiscal 2020 outlook.
• Hexo attributed the shortfall to slower-than-expected store roll-outs, pricing pressure, regulatory uncertainty and a delay in the approval of marijuana derivative products.
• Hexo’s stock promptly fell more than 20% for the day.
• The inference is that the same factors are applicable to other popular marijuana stocks such as Canopy Growth Corp. CGC, -10.56%, Cronos Group CRON, -7.23%, Aphria APHA, -14.29% and Aurora Cannabis ACB, -9.49%.
• Recently, in a surprise announcement, MedMen Enterprises MMNFF, -13.26% abandoned its buyout of PharmaCann, whose price was originally set at $600 million. It was the biggest marijuana deal in the U.S. at that time. MedMen’s CFO was ousted. Those developments created a negative environment prior to Hexo’s announcement.
• The vaping-illness crisis is adding to negative sentiment, especially for a stock like Greenlane Holdings GNLN, +1.18%. For full disclosure, an Arora Report service has a highly profitable short position in Greenlane.
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It is worth repeating Tilray stock’s 75% decline. Many, if not most, marijuana investors have losses in their portfolios. The year-end is approaching. At The Arora Report, we expect significant tax-loss selling in marijuana stocks between now and Dec. 31 unless there is good news that buoys the industry.
What to do now
The plan is to opportunistically pick the points when the selling is the greatest and buy select marijuana stocks. It is important that investors bring sophistication to their marijuana investing by implementing concepts such as long-term core positions and short-term trade-around positions. We also plan to selectively short-sell if there are “up” spikes.
Marijuana investors ought to learn the skill advocated by Arora’s 14th Law of Investing and Trading: “To be successful at investing and trading, become a master of position sizing.”
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.