Separating Fundamentals From “Pot Luck”
Last year it was Bitcoin, this year it’s “Pot” stocks. While there may be plenty of fundamental underpinnings for each, when the prices of “momentum” stocks get a head of steam (sorry, bad pun there), two things are likely: you won’t be able to convince your friend not to buy in at the top, and you won’t be able to stop them from doing the same darn thing the next time a “hot” investment comes along.
Marijuana stocks have made head-lines this year due to what I would consider to be very rational conclusions by investors. Increased legalization of cannabis in various forms across North America seemed inevitable, and in 2018 the dreams of Cheech and Chong, Bill Maher and others finally became reality. In turn, that opens up all kinds of doors for business, and the chase is on to see which companies can position themselves to capitalize. And, in the same way that the popular response to any new cool thing is “there’s an app for that,” so too can I point out that for MJ stocks, there’s an ETF for that…and the symbol is MJ.
I am not offering an opinion on that or any other security. But I will point out that the round-trip (oops, another pot pun) that this roughly-defined “industry” of public companies has taken during 2018 has been anything but chill…it is probably better described as psychedelic. See the chart above.
But the more than 40% top-to-bottom range in MJ during this year, and in fact since August, should tell us that regardless of the pros and cons of this new investable industry within the stock market, it is not quite ready to be farmed by many investors. Like biotech in the 1980s, Dot-Com stocks in the 1990s and many other examples before and since, speculation trumps fundamentals for now. So I suggest if you are considering whether this should have a role in your portfolio, know that reality and the behavior of the stock prices here are not likely to be in sync for a while.
This is not only because the market is trying to figure out how to handicap pot stocks. The late phase of the stock market and economic cycle we find ourselves in is a key contributor as well. Investors are seeking returns in a year when cash is outperforming most stock and bond investment categories. So, when the market gets a whiff (oy, another pun) of something that might just have bandwagon potential, stock prices can fly…and then crash just as quickly.
This is less like bull market behavior and more like the roaring 1920s. And we know how that ended. And if you think that the marijuana stock gyrations have been confined to that industry, look at the chart below, where you can see three other industries that have had similar peak-to-trough ranges this year (30% or more). Remember that these are industry ETFs, each of which has many individual stocks in it. So if the industry group is moving like this, imagine trying to stock-pick in this environment.
High times and low times, indeed. And yet another reminder that the market’s climate has changed. Reward potential still exists in abundance, but the risks often required to pursue that reward are severely elevated. So put that in your pipe and…oh, never mind.
