Marijuana stocks have been on a rollercoaster ride in recent weeks, as new investors have entered the sector with thoughts of becoming instant millionaires.
Some investors have the potential to make millions, but most will lose their shirt. The reason is that marijuana stocks are very volatile and often move mostly on sentiment as well as on market mechanics. An average investor does not understand market mechanics. Further complications arise for marijuana investors from pump-and-dump schemes.
One of the best tools is to look at X-rays of popular marijuana stocks in the form of segmented money flows. Money flows provide an edge to investors who want to beat the market and lower their risks. Let’s explore the issue by looking at money flows with the help of a chart.
Please click here for an annotated chart of money flows in 11 popular marijuana- and cannabis-related stocks. As a group, these stocks do not move with the Dow Jones Industrial Average DJIA, -0.68% S&P 500 SPX, -0.35% and Nasdaq 100 NDX, +0.23% That can provide important diversification. Please observe the following from the chart:
• Momo (momentum) crowd money flows are extremely positive in Cronos Group CRON, -5.20% and Tilray TLRY, -19.11% stock. In contrast, smart money (professional investor) flows are extremely negative in Tilray and negative in Cronos Group. Please read “Tilray is the poster boy of short-squeeze stock candidates — here’s how to find others.”
• Momo crowd money flows are positive in Canopy Growth CGC, +5.46% stock, Aurora Cannabis ( ACBFF, +2.64% Aphria APHQF, +0.62% Neptune NEPT, +0.69% and The Green Organic Dutchman TGODF, +1.01%
• The Green Organic Dutchman is the only marijuana stock where smart money flows are not negative.
• In popular marijuana ETF MJ, -0.58% smart money flows are very negative but momo crowd money flows are positive.
• New Age Beverages NBEV, -35.61% stock has lately been the favorite of the momo crowd. Momo crowd money flows are positive, but smart money flows are negative. Please note that the potential of a short squeeze that can move a stock up is extremely positive. For more on New Age Beverages, see: “The new ‘Tilray’ marijuana stock is here — this is how to set up the trade.”
• Among pharmaceutical-related marijuana stocks, smart money flows are negative and the potential of short squeeze is positive in GW Pharmaceuticals GWPH, +0.93% stock.
• Both smart money flows and momo crowd money flows are negative in Scotts Miracle-Gro SMG, -0.88% a company that has pushed into the cannabis space by suppling hydroponic equipment and supplies as well as other goods for marijuana cultivation.
• Smart money flows are negative in Constellation Brand STZ, -0.29% the brewer of Corona beer.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Rankings
The chart also shows relative rankings of some marijuana stocks. These rankings are based on the six screens of the ZYX Change Method. Please click here to learn about the six screens.
Risk-adjusted rankings are more useful for medium- and long-term positions. Non-risk-adjusted rankings are more useful for short-term or trade-around positions.
What to do now
The long-term prospects for marijuana are very positive. However, there are headwinds in the short term because, on a fundamental basis, the present valuation of marijuana stocks cannot be justified.
On the positive side, next month marijuana will become legal in Canada. This may generate positive sentiment going into the event. However, there is a high probability of a selloff near or after the event.
The best course of action for most investors is to take advantage of the volatility and be highly selective in buying when the right opportunities present themselves. Also be open to taking profits when sentiment becomes overly positive. When sentiment becomes overly positive, it is a contrary indicator. At The Arora Report, we have been highly successful with this approach.
Aggressive investors may consider short-selling to make profits when marijuana stocks fall.
Investors may also want to consider another technique that we have successfully used at The Arora Report over the years to often double returns. The technique is to hold a core position and then trade around the core position with shorter-term positions.
