Cannabis stocks have not yet reached their all-time high
Question: “In your January 25, 2018 Seeking Alpha article ‘Cannabis Stocks: Not a Dot-Com Bubble...Yet,’ you said the industry has not reached an all-time high. Do you still believe this? Legalization is fast approaching and fundamentals are going to be much more important. It is difficult to imagine ACB and WEED can justify their market caps. I wonder if the dot-com bubble was in January?
T.D. from Montreal, QC, Canada
Answer: First, we need some background so I refer to my report you mention. At the time, the cannabis stocks had been moving sharply higher and in the three months from October 20, 2017 to January 26, 2018, the Let’s Toke Business Marijuana Composite Index had risen 52.3%. Because of this, it had reached the point where, in my words, “Investors were afraid to buy and scared to sell.” I observed that the Dot-Com Bubble had been longer and stronger than the cannabis cycle and the end of the Dot-Com Bubble had produced “many high-profit opportunities.”
My conclusion was “The current cannabis cycle has entered a higher risk stage that should see greater price volatility both up and down. But I don't think the bull market is over. Yet. In this stage of the cannabis stock market cycle there are certain investment disciplines that should be used to manage risk in portfolios.”
Here is a summary of what I advised cannabis investors to do in the article you reference. I have shortened the points to save space here. You can read the entire article (here).
There will be many profitable opportunities ahead that you don't want to miss.
Cannabis investors are “risk on,” that is, more willing to assume risk. This is a time of higher risk so investors should not chase stocks up or dump stocks down.
Investors should be ready to sell stocks that pop up strongly and buy them back when they subsequently decline. Do this with something less than half your investment portfolio.
This is a time to remember risk and do what you can to minimize it. Above all, don't get in over your head.
Using portfolio management techniques to reduce investment risk is not an all or nothing strategy. Do things gradually and do not throw in the towel if things aren't going perfectly. Nothing goes perfectly.
My current expectation is the current "step" will end and the next "stumble" will begin before mid-2018. At that time I would want a portfolio to be 25% to 50% cash, that is, have funds on hand to reinvest when the "stumble" ends. The 50% cash is a defensive position.
Finally, it is a time to only own well-researched stocks. Concentrate on companies that don't depend on raising money from investors to keep the lights on and doors open. If you own stocks you bought on a fling, now might be a good time to fling them and refocus your portfolio.
With that is background, the answer to your question is “yes!” I believe the Canadian cannabis industry and the related stocks will move on to new highs, in my opinion. I want to explain that although I advised caution at the time (read Where are We in the Cannabis Stock Market Cycle – February 13, 2018), I expected the cannabis stocks to generate some rallies in prices between then and now. I certainly did not expect that the market would go into a relatively uninterrupted trend down to now. However, as I said in the February article, “I think we are moving from the dynamic phase to the trading phase, and the appropriate strategy now is to focus on increasing quality and building a cash reserve in portfolios.”
So I am not surprised by where we are today although I readily admit the path taken by the market to get here was not what I was expecting. Let me update what I would advise cannabis investors to do today.
I believe there will be many profitable opportunities ahead. This does not change and I think there will be two types of opportunity: (a) Well managed companies with stocks that have fallen so far in the last six months that they represent exceptional value today. From my list, this would include: Khiron Life Sciences (TSXV: KHRN), Radient Technologies (TSXV: RTI) and Sunniva (CSE: SNN). (b) New companies for your portfolio doing something different or differently. From my list, this would include Lexaria Bioscience (OTCQX: LXRP) and additional recommendations on which I am currently conducting due diligence.
This is still a “risk on” period for the cannabis stocks although one must conclude the level of risk is much lower than it was in January 2018 when prices were much higher. My advice is unchanged from six months ago: buy low, do not sell low.
The market will remain volatile so take advantage of it. If you own a cannabis stock that jumps unexpectedly and you cannot find a reason to explain the change, take some profits. If a stock you are following and understand the fundamentals drops unexpectedly and there is no obvious reason to explain it, buy some. Traders often say, “The trend is your friend.” Right now the trend is not your friend and we don’t think it will be until after Labour Day. No change in advice.
This point always applies. Do not get in over your head, aka, don’t risk money you can’t afford to lose. Yes, the risk is lower than it was in January when prices were much higher but the cannabis industry is still relatively immature. Cannabis is still an outstanding opportunity but remember your limits.
Portfolio management is not an all or nothing activity. You will very rarely find a professional manager who is 100% defensive or 100% aggressive. So when I talk about taking some profits are buying on price dips, you can do it in smaller amounts. Do sell all a stock; sell some. Don’t double down; add a bit to an existing holding.
As I said back in January, I am now at the stage where I am expecting the “stumble” to end. For some time, I have been pointing to a post-Labour Day timing. In other words, between now and October 17, 2018 which is legalization day in Canada. Follow our weekly assessment of the market outlook under Marijuana Stock Market Review & Outlook above for our regular updates.
Keep your portfolio invested in better researched companies. Your individual holdings should be generating revenue or very close to it. You must be comfortable that the companies you own today will be in business three years from now.
Finally, a quick response to MO, Canada. Invictus holds its license from Health Canada as AB Labs in Hamilton, Ontario which is #4 on our list below. The company that holds a license may not always be the same company that trades publicly on the market.