Cannabis stocks have no doubt been on fire in recent months. Ticker TLRY has run nearly 500% since it's recent ipo. CGC and CRON have moved around 100% in the same period. However, the run could be short lived. Clearly investors have gotten ahead of themselves. Valuations are becoming outlandish and the stocks are starting to run on hype alone. Everyone knows the Canadian legalization is coming and therefore prices are already baked in. Understandably, day traders have been attacking the momentum due to volatility and lack of other options in this highly grinding, dull, and bullish market. Moreover, the buy the rumor and sell the news scenario is going to come into account. Cannabis companies know their stocks are way over-valued and are taking advantage by releasing almost daily PR's to attempt to keep the run going. Most of these press releases are meaningless with prices up at these levels. Next we will being to see a press release of this nature..."Tilray sells fabulous ounce of cannabis to new customer and they may become a repeat buyer!" We saw the same thing with the last cannabis rush back in 2014. It would be wise to take a look at the 5 year chart on stocks like CANN and ATTBF to see how that ended. Yes, they are OTC stocks, but the charts are no less relevant. Below are some important factors to consider going forward...
1. Investors usually overestimate "next big thing"
2. Overall market in a euphoric state
3. Stock valuations are at overblown levels
4. Profitability and dilution are forgotten
5. Investors chasing due to lack of options
6. Big dogs will be taking profits
8. Buy the rumor, sell the news scenario
9. There are still legal issues to consider
10. There have been recent downgrades
The cannabis situation reminds me a lot of the recent blockchain bubble. As many know, people tend to forget or ignore the past, despite the fact that it always tends to repeat itself. Of course, the majority of trading websites and investor publications are talking bullish on cannabis. The big fish always need to find ways to suck chasing retail longs into buying their sells and ways to squeeze retail shorts into buying to cover up at these levels. Just as I warned everyone about the dangers of Bitcoin at the peak of that bubble, I'm now warning people of the same with cannabis. I'm not saying that long term some of these stocks can't be a good investment, but it is far too soon to know which ones will end up being the winners. We are at a record level bull and the market could potentially correct at any time. No bull market lasts forever and you don't want to be caught at the top of a hyped up cannabis sector when the crash happens. TLRY has an $8 bill valuation (about 200 X yearly revenues) with a net loss that increased 600% year-over-year. CGC has a $10 billion valuation (roughly 100 X yearly revenues) with a net loss that jumped 1000% year-over-year. The market cap of CRON is $2 billion (about 165 X yearly revenues). Clearly these market caps are beyond ridiculous and it would do everyone good to take a look at the following chart as a reminder of what can happen to investors that get sucked into hype and don't lock at least partial profits...
In light of the current overdone valuations my recommendation it to lock some short terms profits and wait for a correction before considering taking a longer term position at a more reasonable valuation. Greed is one of the biggest factors that contributes to trading losses and not taking some gains here could end up being pretty foolish. Bitcoin investors that didn't take profits when prices were at bubble levels are now in hindsight kicking themselves. The ability to have foresight is what really matters in this game. Many ended up losing all gains or got crushed after chasing the peak charts. Keep in mind that cannabis has a strong following, but many buyers are not the most sophisticated or experienced investors. Some may even be high on TLRY, CGC, or CRON products as they purchase shares at these inflated prices. Investing stoned is probably not the best strategy and will likely make for great candidates to bet against. Common trading sense should tell you to expect at least a reasonable correction and that sticking with day trading these cannabis movers makes the most sense for now. Trade smart, lock some profits, and best of luck to all cannabis players long and short!
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