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New Lows (click to expand)
February 28, 2020
What can I say?
It seems our hopes for a bottom in the 2019 cannabis bear market are being dashed — or at least delayed, with potentially even more pain to come.
The lows that held in December and January are now being broken. Specifically, the February low in the ETFMG Alternative Harvest ETF (NYSE: MJ) is a full 22% lower than the lows of the previous three months.
Though we can’t do much at this point in the way of stemming open losses on the long-term seed investments we’ve already made, we have otherwise resolved to sit tight on new investments until we saw additional technical signs of a bottoming pattern in cannabis stocks, something that looked like a very reasonable possibility as recently as January, when shares of MJ traded well above its December high and nearly to its November high.
This all means we must continue to sit tight and should further delay any new plays. The downtrend is back on, unfortunately, and we need to respect that.
Realize there are two very different things at play here…
The cannabis industry was already struggling significantly for many months prior to the latest global stock market sell-off. It is a bit odd that we were waiting patiently for a bottom to form in cannabis stocks, around the turn of the calendar year, while most non–cannabis stocks were at or near their highs.
We shouldn’t be surprised to see cannabis stocks trade lower alongside a global stock market sell-off. But realize, cannabis stocks are now trading lower from an already much lower base than, say, the S&P 500 or the Nasdaq 100.
Does that mean cannabis stocks may hold up better during a panic-driven sell-off, since they’re already corrected to much more reasonable valuations?
That’s certainly something I’m watching for.
Anecdotally, I just did some analysis on the 20-position portfolio I recommended as part of my 20 Trade Ideas for 2020 and Beyond presentation, last October, which included 10 “smart bull” plays, five “hedge” plays, and five of the cannabis stocks I’ve recommended here.
I found that, unsurprisingly given the industry’s struggles, the five cannabis stocks were the largest source of that portfolio’s mild underperformance of the S&P 500 between October and present. But interestingly, since the February 19 peak, the five cannabis stocks have not performed any worse than the S&P.
This is anecdotal, of course, but it suggests there could be relatively less pain still remaining in the cannabis trade as there is in the broader stock market.
The other thing at play here is the fact that the recent global stock market sell-off has been triggered by what most would agree is an “exogenous” event — meaning, coronavirus in the long-term should not factor into the equation much, either in terms of the global economy or asset prices.
Near-term, yes… coronavirus can have a real impact, and most certainly an impact on sentiment. But if the global market does resolve to the upside once the coronavirus scare presumably passes, we could find ourselves back in a more favorable environment for the broader economy and the still-nascent cannabis industry, specifically. And again, since cannabis stocks would be making that recovery off a much lower base, it could be their chance to make an impressive, Phoenix-from-the-ashes type of move.
Unfortunately, there’s no avoiding the pain for the time being. Let’s just bear with it and see if we can get something of a bounce in the next week or so.
Really is a shame… I believe in this industry’s potential, but it sure has been one thing after another!
To new highs,
Still Working on an Unconfirmed Bottom (click to expand)
February 20, 2020
As you know, I was hopeful that cannabis stocks would perk up in January and build on the beginnings of a bottoming pattern that first appeared in December when the industry briefly broke its eight-month losing streak.
We were looking for technical signs of a trend change in progress: higher lows, higher highs, and a higher close.
Shares of the ETFMG Alternative Harvest ETF (NYSE: MJ) climbed nicely during the first two weeks of January. But then they gave back all their gains, and a bit more, by the month’s end.
All told, MJ did make a higher high in January. That’s good. The month’s low roughly matched the low in December, so at least it wasn’t a meaningfully lower low. But, unfortunately, we didn’t get a higher close in January.
For now, we’ll have to continue sitting tight and waiting patiently for a firmer bottom in prices to form.
I still think we’re positioned in some good companies.
Other Open Positions
Liberty Health Sciences (OTC: LHSIF) gained more than 17% in January, making it one of the top-performing stocks in the cannabis industry.
GrowGeneration (Nasdaq: GRWG) also climbed around 16% in January, and so far in February has added another 34% in profits to our position. All told, we’re up around 80% on this play.
Of course, we also have plenty of sore spots that continue to languish in drawdown as the industry struggles to find a bottom.
Two weeks ago, I recommended exiting our position in Precigen (PGEN), which was previously named Intrexon and traded under the symbol “XON” when we made a seed investment in the company’s promising biosynthesis technology. Unfortunately, the company decided to pivot toward traditional health care applications in lieu of the cannabis space.
We moved on since this service is about targeting the massive growth opportunity that the cannabis industry still provides ahead. It simply made sense to cut our losses short and move on to other, true cannabis plays.
We’re also continuing to feel pain in our Medipharm Labs (MEDIF) position, which is a shame since I really believe this company will ultimately leverage its first-mover status and extraction-only focus to build a massively valuable company. But in the near term, some investors have been dissuaded by recent news of Medipharm having to sue one of its customers (a large Canadian LP) for non-payment on a nearly $10 million agreement.
A recent monthly report from industry research provider BDS Analytics shows cannabis sales grew in December, driven largely by a resumption of the growth of the vaping segment. So, I still believe that the worst of the vaping crisis is behind us and Medipharm.
If this market-leader extractor can shake the dark cloud over its head brought about by its relationship to the still struggling Canadian LPs, I think shares of MEDIF will recover strongly.
All told, it still makes sense to remain in “wait and see” mode a bit longer, since January wasn’t as strong a confirmation of the industry’s bottoming as we’d hoped for. Let’s see how the industry and our stocks perform on the back half of February and make assessments from there.
To new highs,
Traveling (click to expand)
February 14, 2020
I won’t have a regular issue of Cannabis Paydays to you this evening, as I am currently traveling to spend some quality time with my family.
Should anything arise, I’ll send you out an alert.
In the meantime, just stay the course. We’ll pick things up next week.
To new highs,
Intrexon Pivots Away from Cannabis (click to expand)
February 7, 2020
Last June, I recommended a seed investment in a small biotech stock that showed promise to earn “fat royalty checks” by licensing its biosynthesis technologies to multimillion-dollar cannabis producers.
I still very much expect biosynthesis to one day become a standard in low-cost cannabis production…
But based on Intrexon’s recent pivot — toward an “increased focus on health care” — it seems that day is likely further into the future than I hoped for.
Here is a link to the press release explaining the name change — “Intrexon” is now “Precigen” — and the company’s decision to focus its efforts on the health care applications that its biotech research is gaining traction in, largely gene and cell therapies. Meanwhile, non-health care business assets are being sold.
Much of the disappointment I’m feeling about Intrexon now being less interested in the cannabis space is par for the course in the biotech space. Early-stage development companies pivot all the time, and often a promising technology ends up taking much longer to develop — particularly as commercially viable — than is expected.
Considering stock investors are accustomed to seeing results now, quarter by quarter… attempting to realize the benefit of a technology reaching its full potential can be a painful trade.
Of course, when it works… when a biotech company and stock hit on something big, the payoffs can be huge!
All told, I still think it was worth taking a shot at Intrexon, as a huge-potential-upside play. But now that Intrexon, well, Precigen, isn’t really a cannabis play… I think we should make an exit.
Action to take: Sell your shares of Precigen (Nasdaq: PGEN).
Note: Your account should be showing a position in “Precigen,” ticker symbol “PGEN” currently, if you previously purchases shares of “Intrexon,” ticker symbol “XON.”
The current bid/ask spread is in the range of $4.59 and $4.64. I recommend working a limit order between the current market spread when you go to place your orders.
To new highs,
Attending the Inside ETFs Conference (click to expand)
January 31, 2020
I’m attending the Inside ETFs conference this week, so we’ll pick back up with our regular issues next week.
I am, of course, still watching the markets. Unfortunately, alongside the coronavirus-driven pullback in the broader stock market, shares of MJ (our cannabis-industry ETF bellwether) have lost some ground and we may not get the higher monthly close we were hoping to see.
This sets February up to be an important month for the bottoming pattern. We’ll have to see if the lows can hold high enough if bulls can push prices to a new higher highs, and where the close is.
Markets take time to bottom, so we should remain patient and see how the pattern develops ahead.
For now, let’s sit tight and wait for the dust to settle a bit.
Enjoy your weekend and the Super Bowl!
To new highs,
Holding the Line, For Now (click to expand)
January 24, 2020
As part of the 20 Trade Ideas for 2020 and Beyond series I mentioned to you guys a few weeks back, I shared with The Rich Investor readers my recommendation of GrowGeneration (Nasdaq: GRWG).
I also showed them this chart of the ETFMG Alternative Harvest ETF (NYSE: MJ), and explained how we’re looking for a few specific technical patterns to develop soon, hopefully confirming the growing likelihood that we’re reaching the bottom of this current cannabis bear market…
I first shared with you here how in mid-December, how after peaking in March, the industry bellwether slid lower for eight months straight into November, when a potential “bottom” began to form.
Now, we’re now needing to see three signs of a bearish-to-bullish trend change… higher lows, higher highs and a higher close, on this monthly candlestick chart.
So far, it seems January is shaping up nicely and will likely deliver these technical signs of a “bottom” in the cannabis industry’s bear market. January has already put in a higher high. And as of today, with exactly one week remaining in the month, prices are holding the line with a small gain over December’s close.
If that holds, and especially so if we see further bullish follow through in February, this could prove to be an important turning point, potentially paving the way for a much easier road ahead and a bullish rally on the industry’s best stocks, which I’m confident still hold a ton of promise!
We’ll of course need to wait patiently for these continuing signs of improvement to develop. But so far it’s encouraging to see shares of OrganiGram (Nasdaq: OGI) maintain a good portion of the positive gains it made when it gave investors a pleasant earnings surprise, last Tuesday. The stock is currently up around 14% year-to-date, and nearly 30% above its pre-announcement Tuesday closing price.
Let’s give this still-bottoming market another week and see if we can count January as a true “turnaround” month.
To new highs,