Should cannabis investors 'sell in May and go away'?

The cannabis market has become accustomed to believing there has been a pattern of strong performance in the fall and the early part of the new year and generally poor performance in the summer. Thus the old stock market adage, “Sell in May and Go Away” would seem to be particularly true in the case of cannabis stocks. However, it is hard enough to make money in the stock market without saddling yourself with investment concepts that are incorrect in fact.

For example, let’s look at ‘Sell in May and Go Away” to the stock market in general. Mark Hulbert is a well- known stock market pundit. He says based on studying data going back to 1897, it has only worked in the third year of a President’s term.

Admittedly, this is the third year of President Trump’s term but still overall the adage might only apply in one year out of four. Not really a ringing endorsement of the concept.

With the cannabis stocks in particular, above is the Let’s Toke Business Marijuana Index plotted since 2014. At first glance, it does seem to have a bit of an up and down pattern. Below is data from the Let’s Toke Business Index in more detail. This chart is based on the chart above.

It shows:

1. Of the six month periods ended November which are supposed to the periods to avoid in the cannabis stocks, only one was up and four were down.

2. Of the six month periods ended May, that is, the better times for investing in cannabis stocks, three periods were up and two were down.

3. Overall, four of the six month periods were up and six were down.

4. The average annual return for all five periods ended November, the bad periods, was -1.8%.

5. The average annual return for the five periods ended May, the good periods was +15.5%.

Statistically, there are some problems with this data:

1. The cannabis industry is relatively new and cannabis stocks haven’t been trading that long. The result is that while a “Sell in May and Go Away” adage can be studied over more than a century of data, the cannabis stocks have only around five years of data to assess.

2. Seasonal patterns in stock prices tend not be reliable. A tendency has to be statistically significant, that is, you must be able to depend on it. We all learned in business school that studies show stock price patterns tend to be random.

3. For something like “Sell in May and Go Away” to be useful, there has to be some logical reason for it to be useful. Just because you find a pattern, you don’t want to be investing money based on it unless there is an explanation. Remember past performance is no guarantee of future.

4. With such a short history, the cannabis stocks might be influenced by coincidence. For example, in 2017 and 2018, Canopy Growth and Constellation Brands announced significant events that pushed stock prices higher. It happened that both these events took place in the early autumn of the past two years. It would be a simply fluke if that happened again.

My conclusion is there is no statistical reason to make investment decisions based on “Sell in May and Go Away.” Although it may be tempting to avoid the cannabis stocks for this reason, I still wouldn’t do it. There is just too little data to support such a conclusion. Having said that, I am cautious with respect to the Canadian based cannabis stocks and favour the U.S. and Internationally-based operators. But I have a very specific reason for this and that is the uncertainty with respect to the October 21, 2019 election.