- Cannabis Stocks Are Back in Vogue Following a Lengthy Bear Market, Which Began at the Same Time Canada Legalized Adult-Use Marijuana in October 2018
- While the Last 1.5 Years Have Tested the Nerve of Many Investors, it Also Exposed the Weak Companies and Similar to the Dot-Com Bubble, Separated the Winners from the Losers
- With Many of the Losers of the Canadian Cannabis Bubble Now Gone or Close to it, the Field Has Been Narrowed Down Creating a More Attractive Environment for the Winners to Flourish and Their Share Prices to Continue Rising
October 17, 2018, is a date that all cannabis investors, advocates and enthusiasts will forever remember. The historic day marked the official legalization of adult-use marijuana in Canada, making it the first major G7 economy and second country after Uruguay to legalize the plant for recreational use nationwide.
October 17 also marked the beginning of another significant event. During the two months leading up to cannabis legalization in Canada, a massive wave of overly bullish investor hysteria, also known as ‘irrational exuberance,’ swept through the sector, sending the vast majority of pot stocks soaring to record highs that for the most part, still stand to this day.
Everyone and their grandma wanted in on the green rush action, and the massive surge in buying caused the legalization catalyst to become fully baked into the price of every stock in the sector. At the beginning of 2018, you could have constructed a winning portfolio by picking random pot stocks out of a hat, and it almost certainly would have been up large come early October 2018.
Canadian Cannabis Bubble vs Dot-Com Tech Bubble
In retrospect, the Cannabis Boom 1.0 or “Canadian Cannabis Boom” was definitely a bubble, and as we know from history, all bubbles burst eventually. Looking back at the dot-com bubble, it bears many of the same hallmarks as the Canadian cannabis bubble such as:
- An arms race took place with companies pushing for rapid expansion at all costs.
- Companies were easily raising large amounts of money from eager investors early on.
- Irrationally exuberant investors were blindly buying anything that even mentioned “Cannabis” or “Dot-Com.”
- Huge quarterly losses were commonplace, with investors turning a blind eye to the poor fundamentals.
- Company management was spending investor’s money like drunken sailors acting as if the party would never end.
- Overpriced acquisitions, many of which would later become large write-downs in addition to unnecessary luxury travel and even private jets, were a common occurrence.
When the tech bubble finally burst in March 2000, many tech stocks were vaporized overnight. Once high flying tech names like Pets.com and Webvan.com were washed out of the market, joining a long list of dot com losers. However, a small group of the stronger companies would survive the carnage, eventually coming out the other side to thrive.
The companies that managed to successfully weather the storm following the burst of the tech bubble went on to become some of the most well-known brands in the world today. Dot-com survivers included Amazon.com (NASDAQ: AMZN), Apple (NASDAQ: AAPL), International Business Machines (NYSE: IBM), eBay (NASDAQ: EBAY), Adobe (NASDAQ: ADBE) and Priceline.com, which now goes by the name Booking Holdings (NASDAQ: BKNG).
Google or Alphabet Inc. (NASDAQ: GOOG), which had yet to go public at this point, benefited enormously from the dot-com bubble bursting as suddenly the field was cleared, allowing the company to fill the void and expand with little competition at a fraction of the pre-bubble cost. Google was also able to hire the best employees, many of whom were now out of work.
The hype surrounding the marijuana sector began to grow exponentially and cannabis stocks began their final parabolic move at the end of August 2018. As a result of the huge influx in new buying in the cannabis space, some experienced investors started to realize that this historical catalyst would likely be a ‘Sell the News’ event. The idea of selling on such positive news might seem confusing to some, but the psychology behind such an event can be attributed to the adage “Buy the Rumour, Sell the News.”
The saying is based on a phenomenon that occurs in financial markets where the price of a stock rises during the lead up to an expected big announcement, and then once the good news is officially released, the stock sells off. I’m sure many have experienced this same situation when an investment they held increased in value leading up to a highly anticipated positive announcement only for the stock to drop once the good news hit the newswires.
The scenario can usually be boiled down to the following:
- Investors buy stock in a company after hearing that “big news is coming soon.”
- Word spreads about the bullish announcement, and more investors pile in, driving the price even higher.
- The good news is confirmed after the company releases a great press release, but the stock drops.
How and why does this happen?
- Because so many already knew about the likely announcement and established their positions in advance of its release, the good news was already baked into the share price of the stock.
- As the pros start to exit their positions, go short or, in some cases, both, there is a lack of new buying volume to keep pushing the stock higher. Spooked amateurs may even panic sell in confusion, adding to the downward pressure.
- With more motivated sellers than motivated buyers, the stock drops despite the good news.
- For long term investors, this short term technical event is usually irrelevant or a buying opportunity. As long as the company is strong and still meeting the investor’s criteria, it usually not a big deal.
In this case, however, the ‘big news’ was coming from the Canadian federal government and not an individual company. For this reason, the entire cannabis sector would be influenced by the announcement.
With more and more FOMO stricken novice investors continuing to pile into the sector totally oblivious to the fact pot stocks could actually drop as a result of the positive and historic cannabis industry milestone, hedge funds and experienced traders were starting to take profit and ‘go short.’
Like the movie ‘The Big Short,’ investors were now betting against the cannabis sector, which turned out to be a massive win for the shorts. Almost immediately, as Canada legalized recreational pot, selling pressure began to increase, new buying started to dry up, and as some predicted, the market rolled over sharply.
The vicious correction that would follow officially started on October 16, 2018, after the cannabis market had soared to another new all-time high. That very same day pot stocks reversed sharply, setting off an avalanche of panic selling. In the two weeks that followed, the Horizons Marijuana Life Sciences ETF (TSX: HMMJ) dropped as much as -39.15% and sector bellwethers at the time, Canopy Growth (TSX: WEED) (NYSE: CGC) (FRA: 11L1) and Aurora Cannabis (TSX: ACB) (NYSE: ACB) (FRA: 21P) plunged up to -45.49% and -49.94%, respectively.
Cannabis Boom 1.0 = 🇨🇦Canada | Cannabis Boom 2.0 = 🇺🇸United States
For the majority of Canadian cannabis stocks, October 16, 2018, is still the day they hit their all-time high share price. Fast forward a year and a half through the bear market that followed and through all the mistakes Canada and individual provinces such as Ontario made as they completely botched the rollout of adult-use cannabis. Fast forward through the several false market bottoms as well as the COVID-19 stock market crash, and it appears that pot stocks finally bottomed out in mid-March of this year.
However, it’s important to note, the days of every marijuana company’s stock rising along with the sector and trading as one big group are long gone. The tough times that cannabis investors had to endure have forced them to be much smarter with their investment capital, which, for the most part, is now being directed towards the stronger companies. The weaker stocks have been left to fight over the scraps, with many now out of business or on life support living off toxic financings and flirting with bankruptcy.
Every Boom & Bust Producers Winners & Losers
Big names that were once high-flying pot stocks like MedMen (CSE: MMEN) (OTCQX: MMNFF) (FRA: 0JS), Green Growth Brands (CSE: GGB) (OTCQB: GGBXF), iAnthus Holdings (CSE: IAN) (OTCQX: ITHUF) (FRA: 2IA) and CannTrust (OTC: CNTTQ) can definitely be crossed off the list and marked as clear losers of the Cannabis Boom 1.0. It may take a little more time until the full list of losers becomes clear to investors. Companies such as Green Organic Dutchman (TSX: TGOD) (OTCQX: TGODF) (FRA: O1GA), HEXO Corp. (TSX: HEXO) (NYSE: HEXO) (FRA: 74H) and Aurora Cannabis (TSX: ACB) (NYSE: ACB) (FRA: 21P) are teetering on the edge of falling into the losers category after having their poor financial situation exposed during the bear market as investors started lifting the hood and conducting proper due diligence. Aurora seems to have turned the corner after its surprise Q3 earnings pushing it back towards the winner’s side. Our full list of likely Cannabis Boom 1.0 winners can be found at the end of this article.
In CannTrust’s case, they simply got caught cheating when Health Canada uncovered that the company was growing cannabis in unlicensed rooms. At the same time, top executives tried their best to conceal the shady operations. CannTrust now trades over the counter on the pink sheets after being kicked off the TSX and NYSE and is also listed as “Delinquent SEC Reporting.”
Aurora Cannabis seemed all but finished following the company’s long string of bad news and 1-for-12 reverse stock split, but a surprise earnings beat turned things around in an enormous way. Aurora’s better than expected Q3 earnings, which were released on May 14, 2020, sent not only ACB’s stock but pretty much the entire cannabis sector soaring. Cannabis investors haven’t seen upside moves this large since pre-October 2018, leading many to believe that a new bull run or the Cannabis Boom 2.0 is officially underway.
While it’s true, even some of the shitty weed stocks are rising right now, but don’t be fooled again; this rally hasn’t changed their fundamentals, so the weaklings will likely get shorted back down to earth shortly. Moving forward, take the lessons learned from the Cannabis Boom 1.0 and invest only in the best cannabis companies with the strongest balance sheets. Due your due diligence and block out the crowd noise.
Emerging from the recent bear market are the easy to spot winners like U.S. multi-state operators (MSOs) Trulieve (CSE: TRUL) (OTCQX: TCNNF), Curaleaf (CSE: CURA) (OTCQX: CURLF), Green Thumb (CSE: GTII) (OTCQX: GTBIF) (FRA: R9U2), and even though they aren’t publically traded yet, Red White & Bloom (RWB). Following the close of RWB’s highly-anticipated merger with Tidal Royalty, Red White & Bloom Brands Inc. (CSE: RLTY.U) (OTC: TDRYF) is set to commence trading on the CSE very soon under the new ticker symbol ‘RWB.’
Red White & Bloom is a U.S. ‘Super State Operator’ led by the highly successful cannabis industry legend Brad Rogers. RWB has grown it’s business exponentially over the last year or so while also raising over USD $100 million operating as a private company. With assets in Michigan, Illinois and Massachusetts, RWB currently has 600 employees, 22 individual facilities and a combined cultivation footprint of 4 million sq ft.
As we reported near the end of 2019, in Michigan alone, RWB was already generating over $100 million annually, with CEO Brad Rogers stating that those figures could grow to as much as $250 million – $300 million in 2020. Soon investors will have the opportunity to own a piece of the massive cannabis firm, which has declared on many occasions, will be heavily focused on profitability along with growing revenues.
In Canada, companies with substantial cash positions like Canopy Growth (TSX: WEED) (NYSE: CGC) (FRA: 11L1) and Cronos Group (TSX: CRON) (NASDAQ: CRON) (FRA: 7CI), seem like the best bet. Both companies have already staked a claim in the massive U.S. market, which is where the likely much larger Cannabis Boom 2.0 will take place. Investors should also have profitable stocks such as Aphria (TSX: APHA) (NYSE: APHA) (FRA: 10E) at the top of their lists moving forward.
Top Gainers Since the Mid-March Market Bottom
Lastly, let’s take a look at the top cannabis stock gainers since the market bottomed in mid-March. The list we have compiled below will provide you with some additional names to research while considering your next investment in the cannabis space. This list also includes the winners from the Cannabis Boom 1.0 plus a few extra names that may or may not belong. We’ll let you decide that for yourselves.
While several stocks on our list, such as Aurora for example, may have some work left to do, but ACB’s recent Q3 earnings have catapulted the company back into the picture after clearly proving that major fundamental changes have been made. Aurora followed up its impressive financials by announcing last week that it will be entering the U.S. market by acquiring CBD brand Reliva for $40 million. Aurora clearly understands that in order to be part of the cannabis boom’s next big growth phase, companies need to be positioned in the United States market. Everyone loves a good comeback story, so it’s great to see ACB turn the corner after being written off for dead.
Obviously, the list is somewhat subjective, so it isn’t written in stone. Some may believe that certain companies should be on our list that are not currently on it and vice versa.
In our opinion, this list goes a good job of narrowing down the field so that you can focus your attention on the cannabis stocks with the highest chance to succeed over the long term. If you believe we missed a stock or included one that doesn’t belong, by all means, please feel free to email us or hit us up on social media to let us know your thoughts. We’d love to hear what other investors have to say.
Cannabis Stock Winners
*Percent gain figures have been updated as of May 26, 2020
- Red White & Bloom Brands Inc. (CSE: RLTY.U) (OTC: TDRYF) | IPO as “CSE: RWB” Imminent
- Tilray (NASDAQ: TLRY) (FRA: 2HQ) | +377.37%
- SOL Global (CSE: SOL) (OTCPK: SOLCF) (FRA: 9SB) | +357.14%
- Hollister Biosciences (CSE: HOLL) (OTC: HSTRF) (FRA: HOB) | +300%
- Harvest Health (CSE: HARV) (OTCQX: HRVSF) | +265.67%
- Neptune Wellness (TSX: NEPT) (NASDAQ: NEPT) | +255.56%
- TransCanna (CSE: TCAN) (OTC: TCNAF) (FRA: TH8) | +206.82%
- Canopy Rivers (TSX: RIV) (OTC: CNPOF) | +201.85%
- Village Farms (TSX: VFF) (NASDAQ: VFF) (FRA: 02V) | +198.34%
- Aleafia Health (TSX: ALEF) (OTCQX: ALEAF) (FRA: ARAH) | +174.19%
- Green Thumb (CSE: GTII) (OTCQX: GTBIF) (FRA: R9U2) | +171.74%
- GrowGeneration (NASDAQ: GRWG) | +166.03%
- Acreage Holdings (CSE: ACRG.U) (OTCQX: ACRGF) (FSE: 0VZ) | +165.77%
- Aurora Cannabis (TSX: ACB) (NYSE: ACB) (FRA: 21P) | +156.61%
- Curaleaf (CSE: CURA) (OTCQX: CURLF) | +152.42%
- Charlottes Web (TSX: CWEB) (OTCQX: CWBHF) | +149.26%
- Cresco Labs (CSE: CL) (OTCQX: CRLBF) | +148.75%
- Trulieve (CSE: TRUL) (OTCQX: TCNNF) | +132.84%
- Canopy Growth (TSX: WEED) (NYSE: CGC) (FRA: 11L1) | +129.71%
- Aphria (TSX: APHA) (NYSE: APHA) (FRA: 10E) | +126.42%
- Innovative Industrial Properties (NYSE: IIPR) | +115.84%
- Columbia Care (CSE: CCHW) (OTCQX: CCHWF) (FSE: 3LP) | +116.57%
- MediPharm (TSX: LABS) (OTCQX: MEDIF) (FRA: MLZ) | +100.83%
- GW Pharma (NASDAQ: GWPH) | +95.57%
- Planet 13 (CSE: PLTH) (OTCQX: PLNHF) | +89.9%
- Liberty Health (CSE: LHS) (OTCQX: LHSIF) (FRA: S6UQ) | +84.37%
- TerrAscend (CSE: TER) (OTCQX: TRSSF) | +81.03%
- Cronos Group (TSX: CRON) (NASDAQ: CRON) (FRA: 7CI) | +68.38%
- Organigram (TSX: OGI) (NASDAQ: OGI) (FRA: 0OG) | +68.18%
- Valens GroWorks (TSXV: VLNS) (OTCQX: VGWCF) (FRA: 7LV) | +61.71%
*Percent gain calculated from mid-March 2020 intraday low to most recent intraday high.
Disclosure: The Cannabis Investor holds a position in RWB. Hollister Biosciences is a client and TransCanna is a previous client of The Cannabis Investor.