Leading cannabis stocks are no longer trading above their intrinsic value, says author
Kiril Nikolaev | January 29, 2020 | SmallCapPower: Why go for overbought FAANG stocks that have limited upside when you can buy a badly beaten cannabis industry that’s ripe for bottom-picking?
(Originally published on ccn.com on January 21, 2020)
After a strong start in 2019, the cannabis industry entered a vicious bear market. Weak sales performance, as well as government issues, drove pot stocks to record lows. Exchange-Traded Fund MJ, a bellwether of the industry’s performance, printed a yearly high of $39.25 in March 2019. The ETF then plunged to $15.95 eight months later for a massive 59.4% devaluation.
The good news is that the marijuana industry is starting to come to life. One analyst even believes that pot stocks will mirror Apple’s performance last year.
Leading Cannabis Stocks Are No Longer Trading Above Their Intrinsic Value
Many were pulled in by the cannabis boom between 2018 and early 2019. The pot industry was considered high-growth. Investors bought marijuana stocks regardless of fundamental value out of the belief that prices will go higher. During that time, leading cannabis names were extremely overvalued.
Cronos Group Inc. (TSX:CRON) had an astronomical PE ratio of 1,013.41 in September 2018. Canopy Growth Corporation’s (TSX:WEED) PE ratio skyrocketed to 324.7. With the correction over the last few months, many cannabis stocks are no longer overvalued. Some like Cronos Group are actually undervalued with a PE ratio of 9.788.
In short, the bear market eliminated the mania in the industry. Now, pot stocks are in a position to grow in a sustainable fashion.
Marijuana Industry Flashing Bottoming Out Signals
The widely-followed traderstewie took to Twitter to share his rosy outlook on the distressed industry. The analyst wrote that a new year often comes with a new trend. Last year, Apple was one of the most dominant stocks in the S&P 500. This year, pot stocks could grab headlines.
Based on traderstewie’s charts, Apple bottomed out in early 2019 after breaking out from a falling wedge. MJ, WEED and CRON appear to be following the tech giant’s footsteps in terms of price action. The three cannabis names have also broken out of their falling wedges. In addition, these three securities generated above average volume. The uptick in volume signals that investors are interested in buying at current levels.
While the cannabis industry is starting to show signs of strength, it is evident that many pot stocks are not out of the woods yet. It’s quite possible that the industry is experiencing a dead-cat bounce due to oversold conditions. After all, the pot industry is not a tech giant like Apple. If the industry manages to recover, there may be a bumpy ride ahead.
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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