Could Weed Stocks Be Worth the Investment?
Exponential moves in asset prices can be very dangerous at times.
If you are an investor thinking about buying things that have increased significantly over a short period of time, it may be time to pause and reflect rather than getting aggressive.
Just this past weekend, I was having dinner with a long-time friend of mine. She’s a medical professional and has been trying to play the stock market a little bit as well.
“Moe, what do you think about weed stocks? You think there’s some value?” she asked.
For those of you who don’t know, marijuana (cannabis/weed) is about to become legal in Canada in October 2018. This has investors riled up. Companies that have anything to do with weed are skyrocketing.
My friend mentioned companies like Tilray Inc (NASDAQ:TLRY), Cronos Group Inc (NASDAQ:CRON), Canopy Growth Corp (NYSE:CGC), and Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB). All of them are marijuana-related companies and have grown exponentially in value.
My friend told me that she was “looking for the next moonshot.”
As long as I have known her, my friend has been a big fan of things that tend to get a lot of attention. Sadly, she hasn’t been very successful in finding the so-called “moonshot.” She tried her luck with cryptocurrencies but it didn’t really turn out too well for her.
So, I asked her, “Why do you ask about weed stocks?”
“Because few of my co-workers were talking about it, and they have made a killing with weed stocks and I wonder if I could too,” she replied.
Here’s the thing: In the short term, valuations don’t matter much. In the short term, momentum matters a lot more than anything else.
However, in the long term, valuations matter. A lot.
Weed stocks may have been a great opportunity back in 2016 and even in 2017. But right now, they are seeing exponential moves to the upside.
From experience, I know that exponential moves don’t last very long. They are not sustainable.
Look At Tilray Inc
Take a look at Tilray Inc stock.
It launched its initial public offering (IPO) in July at $17.00.
On September 19, it traded as high as $300.00—representing an over-1,600% move to the upside.
What changed over the past few months? Not much, other than investor sentiment. Investors took it higher without questioning anything.
Guess what happened in the days following that rise.
By September 21, Tilray stock was trading at $120.00—it had dropped 60% in a matter of days. Why? Because valuations were questioned and investors were faced with reality.
It Was More Profitable to Own This Stock in the Last Few Months Than at Any Time Since Its IPO
Mind you, Tilray stock is just one example.
We see this sort of thing prevail across the marijuana sector. Take a look at the chart of Canopy Growth stock.
Chart courtesy of StockCharts.com
It was more profitable to own Canopy Growth stock between July 2018 and September 2018 than at any time since the company started to trade on the stock market.
“When asset prices are increasing exponentially, and everyone talks about them, it’s a very scary thing,” I told my friend.
“We saw it with cryptocurrencies as well. You have missed the boat. There’s really no point chasing the returns. Why? Because there are a lot of speculators and emotional traders present, and they sell, even on the slightest negative news.”
Where’s the Next Big Trade?
“Is there anything you would look at that could offer a moonshot kind of opportunity?” she asked.
In the end, this is what I told her: “Listen, if you are looking for the next big trade, it may not be a bad idea to look at the mining sector. It’s selling for so cheap, that it’s almost comical. Miners could be the next millionaire makers. But, obviously, with time we will know more.”