Will Marijuana Stocks Continue to Climb?

Reminiscent of election year, Marijuana stocks have recently been on a tear. Companies such as Tilray (TLRY) and Aurora Cannabis (ACBFF) have each risen over 60% in just this past month alone. During the 2016 U.S. elections, marijuana stocks rose significantly in anticipation of the candidates' favorable marijuana policies. However, most came crashing down after the elections. Although I do not anticipate a decline of that magnitude, I do believe that over the coming weeks, marijuana stocks will dive. Here's why.

The marijuana sector is heavily reliant on momentum. It relies heavily on rumors and expected news as it is still not legal everywhere. Essentially, the sector follows the old saying: "buy the rumor, sell the news."'

In this case, I believe the entire sector has been moving in anticipation of Canada's decision to legalize recreational usage of marijuana. A move like this can completely reshape the global cannabis market, and such an impact has been expressed through the recent rise in the sector.

However, the days leading up to the actual news (in this case, October 17, when Canada officially legalizes recreational marijuana use) are considered the rumor. After October 17th, I believe the sector will dip because the catalyst will have already settled in and technicals will kick in as well. However, I believe this dip will only be short-term.

From a long-term perspective, I believe the marijuana sector will be the fastest climber in the months and years to come. Primarily, this belief stems from its demand. In Canada alone, a study by CP24 and Bloomberg concluded that Canadian marijuana producers may only meet 30-60% of the country's demand for cannabis. Given this extremely high demand, if marijuana is legalized globally - at least, in countries that have the highest demand for the product -, I believe their may be unprecedented growth for the entire sector.

Also, from a neutral point of view, governments should be able to get over the previous ethical dilemma with marijuana. As a new age of consumers and, consequently, political leaders arise, the ethical issues surrounding cannabis should diminish significantly. Likewise, for current government leaders, legalizing marijuana makes fiscal sense. As mentioned before, the demand is sky high, and having taxes on cannabis will create enormous new government revenue streams (i.e. Colorado having excess money just from marijuana taxes alone).

Essentially, although a dip is highly likely in the short term, the sector itself will see massive returns in the long term due to its mass appeal and probable favorable government rulings.

My Short Take:

Short Term: Avoid most, if not all stocks, in this sector until after a possible decline after October 17th. If you are currently holding any marijuana-related stocks, continue to hold your position.

Long-term: Buy marijuana stocks after said possible decline and hold. My favorite marijuana-related company is Canopy Growth (CGC), given its currently excellent financial health (particularly, its cash flow) and recent partnership (which will come into fruition in 2019) with Constellation Brands (STZ). Tilray (TLRY) is also a good company, but it is more volatile than CGC.

Please read my disclaimer before taking any financial action. Rishabh Reddy does not currently own any of the companies mentioned above.