The cannabis industry as a whole holds a ton of promise, which Rodney alluded to yesterday when he discussed Tuesday’s Senate Banking Committee hearing. But since many companies won’t live up to their hopes and dreams, I think investors are best-served taking a technical approach to buying pot stocks.
In mid-May, I shared my “technical take” on Aurora, Cronos, and Tilray, three of the industry’s biggest players. At the time, they were all on my “avoid” list. They didn’t (and still don’t) meet the stringent criteria of my trend and momentum system… so I’m avoiding them for now.
Since sharing that analysis, shares of Cronos (Nasdaq: CRON) are down about 2%, while Tilray (Nasdaq: TLRY) has lost 10.6%, and Aurora has shed more than 18%!
Of course, I’m not taking credit for forecasting the price declines of those specific stocks. The reality is that the broader cannabis space had been suffering through a pullback. The industry’s most liquid ETF — the ETFMG Alternative Harvest ETF (NYSE: MJ) — is down around 10% since mid-May.
In fact, a string of bad news and PR has caused some hesitation among the industry’s investors of late.
Regardless, I’m incredibly bullish on the cannabis space as a whole. So much so that I believe that, using the Cannabis Profit Code I’ve created, you could bank up to 25 1,000% winners in the next five years!
Cannabis stocks are more volatile than your “average stock,” so I strongly advocate following a proven strategy in this space. Let me show you what I mean…
One Wild Ride
As I said, cannabis stocks are volatile.
You expect that from the smallest and most speculative pot stocks. But even the big industry-leading ones are far more volatile than what you’ll find in the S&P 500.
There are currently about 250 to 300 publicly traded stocks that we can call “pot stocks.” Of those, there are only 25 stocks that have an average daily trading volume equal to $10 million or greater. In comparison, there are only three stocks in the S&P 500 that trade less than $10 million a day — most S&P 500 stocks trade far more.
So today, let’s look at the volatility of the biggest pot stocks… during two time periods. Cannabis stocks reached a mid-year peak on March 14 and then pulled. Here are some summary statistics since then:
As you can see, the average “big-and-liquid” pot stock has gained a measly1.6% since mid-March, whereas the S&P 500 is up 4.7%. And that’s reflective of the cannabis industry’s recent pullback.
More importantly though, the standard deviation of those 25 pot stocks has been three-times greater than S&P 500 stocks!
And you can see these extremes more closely by considering the minimum and maximum returns. One pot stock is down 68%, whereas the worst S&P 500 stock is down a milder 35%… one pot stock is up 120%, whereas the best S&P stock is up just 66%.
All told, these statistics clearly point to pot stocks being far more volatile than S&P 500 stocks. And remember, these are the biggest, most heavily traded pot stocks out there!
But how do these numbers look year-to-date?
They look essentially the same, though pot stocks are showing remarkable returns, even despite the more recent pullback!
The average 2019 year-to-date return of the 25 pot stocks I analyzed comes in at an impressive 52.5%, trouncing the S&P’s 18.8% return.
With that 2.8-times greater return comes a 4-times greater standard deviation, which means far more variability around the average.
Though, interestingly, it appears pot stocks have offered a good trade-off between “max” winners and losers this year. The worst pot stock is down 42.5% — just 1.2-times worse than the worst S&P stock. While the best pot stock has been up 263.6% — or 3.5-times better than the top-returning S&P stock this year.
So here’s the big question…
Is Volatility A Bad Thing?
I’ve long said that volatility is neither good nor bad. It all depends on your comfort level and if you know how to harness the good aspects of volatility, while also mitigating the bad aspects.
In my Cycle 9 Alert research trading service, we routinely trade highly volatile instruments (options). But since we put what I call the “asymmetry of risk and return” in our favor, we’ve been able to establish a long track record of success.
Yes, some of our volatile investments blow up in our face. But since our winners are bigger than our losers, we come out on top in the end!
Pot stocks will be far more volatile than your average S&P stock. Many pot stocks will lose 50% or more in short order. And more than a few will go all the way to zero. But the upside potential for many of these highly volatile pot stocks is enormous — far greater than anything you’ll find among the major market averages.
So, the real question is: Can you stomach the volatility?
Cannabis is known to settle the stomach, but cannabis stocks may have the opposite effect! In the end, I think all serious investors should figure out a way to gain exposure to the cannabis space, despite the excessive volatility. And I’m looking forward to sharing a few techniques I have up my sleeve to do just that.
The first step is simply acknowledging how volatile these stocks can be. Once you’ve done that, you can establish an action plan… which I’ve done for you. Check it out here.