By Nigam Arora
Given the tremendous potential of the cannabis industry, it’s natural for investors to be attracted to marijuana stocks.
Investors have stars in their eyes. My inbox is flooded with offers to make me a marijuana multimillionaire. Age-old “pump-and-dump” schemes are in full bloom in marijuana stocks. The headline of this article is a borrowed one; my only contribution is the word “carefully.”
Let’s explore this topic with the help of a chart. Eleven points to potentially make millions will follow.
Please click here for an annotated chart of analysis of marijuana stock Canopy Growth /zigman2/quotes/200603886/composite CGC -2.82% . I have picked Canopy Growth because it is the biggest marijuana stock.
• The chart shows the sell signal given by The Arora Report in June right at the prior peak. Subsequently the stock lost more than one-third of its value.
• Canopy Growth reported earnings below the consensus, and significantly below the whisper, numbers. Stocks move based on the difference between reported earnings and projections compared to the whisper numbers. Canopy Growth was well on its way to lose one-half of its value from the peak when the news came of a major investment in the company. Constellation Brands, /zigman2/quotes/207737284/composite STZ -0.64% , known for its Corona beer, invested about $4 billion, paying a whopping premium of 51.2%.
• The chart shows the heavy volume and move in the stock on the news. An “up” move on heavy volume is considered positive.
• The chart shows The Arora Report signal to buy Canopy Growth. When The Arora Report gives a buy signal, it simultaneously gives a target zone.
• As shown on the chart, the top band of the target zone was $40 at the time of the buy signal and subsequently was raised to $50.
• When Canopy Growth’s stock price went over the price paid by Constellation Brands, The Arora Report gave a signal to take partial profits on a 10% tranche and raise stops on some quantity to protect profits.
• It is important to note Arora’s Second Law of Investing: “No one knows with certainty what is going to happen next.” The best that investors can do is make decisions based on probabilities. The probability was high that Canopy Growth stock would back off after it became more expensive than the value that Constellation Brand put on it. However, there was also a high probability of rumors of takeovers emerging at that time. For this reason, partial profits were taken only on a 10% tranche.
• As we anticipated, the rumors caused a further runup in the stock. The latest rumor was that Diageo /zigman2/quotes/208129584/composite DEO +0.06% , the maker of Smirnoff and Johnnie Walker, was in talks with at least three Canadian cannabis companies.
• The rumors caused a big jump in marijuana stocks, including Aurora Cannabis , Aphria , Cronos Group /zigman2/quotes/206842762/composite CRON -0.45% , Tilray /zigman2/quotes/209129655/composite TLRY -3.67% , Neptune Technologies /zigman2/quotes/207537677/composite NEPT -2.76% and marijuana ETF /zigman2/quotes/204332491/composite MJ -1.57% .
• Momentum (momo) crowd money flows have been extremely positive in Cronos Group. Cronos Group also saw a short squeeze that was more intense than in other stocks in the group.