Is The End Near For Pot Stocks?

Is this the end for marijuana stocks or part of a healthy correction in a continuation of a bull run? Are these stocks part of your financial independence plan?

Looking at the Horizons Marijuana Life Sciences Index ETF, ( TSX:HMMJ or NasdaqOTC:HLMSF) chart below from Bigcharts.com, you see marijuana stocks was on a tear, almost tripling from inception of $10.00 to its high of $27.00. More recently, the ETF dropped to around $16.00 below its 200-period exponential moving average (EMA) before bouncing back to settle at $18.76, just above its 200 EMA, a drop of over 30%.

The Technicals

The 200-period moving average is a key support and/or resistance. Breaking this moving average generally indicates a reversal in trend. It will be crucial for the ETF to hold this price if the bull run is to continue. On the positive, the MACD, slow stochastic and RSI is looking a little better. There’s a cross-over on the slow stochastic and the MACD looks like its starting to turn in the right direction. However, I wouldn’t trade it until I receive confirmation of a cross-over. The RSI is also starting to move in a positive direction. There are definitely improvements from a technical perspective but not enough for me to buy.

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Why I’m Concerned

I don’t own or follow marijuana stocks because they don’t fall into my investment style and was not part of my financial independence plan that helped my wife and I reach early retirement (I talk about finding my investment style here). With that said, I couldn’t help looking into this sector because I’ve started hearing more about it from friends and family members. My alarm bells go off when I receive ‘tips’ from neighbours and acquaintances. This is reminiscent of other bubbles I’ve experienced in the past.

During the late 90’s when the dot.com bubble was in full swing, I was working as an Investment Representative (IR) at a discount brokerage. As an IR, I had a chance to speak with many retail investors regarding their trades. Due to regulations, IRs are only permitted to provide factual information (eg. news, bid/ask sizing, or tender offers). I received many calls from new retail investors trying to get into the markets based on tips they received from a neighbour, relative and/or coworker about a hot stock and they heard how much money was made in a short period of time. They were experiencing FOMO (Free Of Missing Out) and ‘needed’ to get into the market. There was no investment plan or analysis of the company, it was FOMO at its worst. This is definitely not the steps to financial independence.

Business Fundamentals Required

One of the crazy things I recall during this period was how people were valuing companies based on click rates or pageviews. Most dot.com companies during this period weren’t making money and were burning through their cash. As long as there were more views, their stock price kept going up. Eventually, reality set in and people realized companies needed sound business fundamentals; companies had to make money to be successful and survive. We all know how the dot.com ended. However, there were some companies that survived and thrived after the bust. These were companies that had a real business plan, with real earnings and fundamentals.

Final Thoughts

I know the business model between dot.com companies and marijuana companies are different. Many people are betting on the potential growth of these companies based on the legalization of marijuana. I can appreciate that, but people aren’t looking at the fundamentals. Only a small minority of marijuana companies are making money. They are the ones that will probably survive.

Is this the beginning of the end or just a healthy correction? I don’t know, but if I was in this sector, I would proceed with caution. I would only invest money I can afford to lose or take some profit off the table, but that’s just me. 

What are your thoughts on this sector? Remember one of Warren Buffet’s famous quotes “Be fearful when others are greedy…”.

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