By Nigam Arora
I’ve warned investors that making money in marijuana stocks is not as simple as loading up when the news is good. That’s because bad news is sure to follow.
Thursday was a prime example in the stock market.
A lucrative industry does not mean that every company is a good investment. And even when a company is good, it does not mean that the stock is appropriately priced. In addition, marijuana stocks in particular are vulnerable to unsustainable valuations, sentiment shifts, high volatility, short squeezes, and “pump and dump” schemes.
At this time, the last thing marijuana stock investors needed was a punch in the gut, but they got one anyway.
Let’s explore what happened Thursday with the help of a chart.
Note the following:
• The chart shows the zone that represents the price paid for Tilray’s stock by a large number of investors who are still holding the stock.
• The chart shows that, on average, a typical investor appears to have lost about 75% of her investment.
• The chart shows the Arora signal to short-sell or sell Tilray as high as $280. The profits on the last tranche have been taken as low as $24. In short-selling, money is made when a stock falls.
• The latest downturn in marijuana stocks is in response to an announcement by marijuana company Hexo Corp. /zigman2/quotes/206508254/composite HEXO -6.13% . Hexo said Thursday that fourth-quarter net revenue will be about $14.5 million to $16.5 million, and net revenue for the year will be about $46.5 million to $48.5 million. Both numbers are disappointing and below consensus estimates.
• Hexo withdrew its fiscal 2020 outlook.
• Hexo attributed the shortfall to slower-than-expected store roll-outs, pricing pressure, regulatory uncertainty and a delay in the approval of marijuana derivative products.
• Hexo’s stock promptly fell more than 20% for the day.