Marijuana has a bright future, but making money in marijuana is not as simple as buying a few stocks.
That is due to absurd valuations, short squeezes, pump-and-dump schemes and the prevalence of the momo (momentum) crowd in marijuana stocks. The momo crowd buys marijuana stocks because they are going up — this is not a good reason for prudent investors to buy marijuana stocks.
For those serious about making money in marijuana, there is a better tool. The tool is segmented money flows.
Since I wrote “How to potentially become a marijuana millionaire, albeit carefully,” a lot of money has been made in marijuana stocks by following money flows and ignoring company earnings. The Arora Report’s track record of success in marijuana stocks is easily verifiable. Let’s examine the current money flows with the help of a chart to help marijuana investors.
Read: Canopy Growth co-CEO reveals top priorities for world’s largest legal marijuana company
Chart
Please click here for a chart showing segmented money flows in 17 popular marijuana stocks. Please note the following:
• The popularity of individual marijuana stocks rise and falls. Moreover, new stocks become available for trading. For this reason The Arora Report periodically makes changes to the marijuana stocks that are included in the list of money flows.
• The three new stocks added are KushCo Holdings KSHB, +4.82% Curaleaf Holdings CURLF, +0.41% and Acreage Holdings ACRGF, -0.47% Smart money flows are negative in all three of them. However, momo crowd money flows are extremely positive in Acreage Holdings and Curaleaf Holdings. The short squeeze flows are also very positive in those two stocks.
• During the California gold rush, many gold miners went bankrupt but the merchants who supplied picks and shovels prospered. KushCo Holdings is supplying packaging, bottles and other ancillary items to the marijuana industry. Perhaps there will be a repeat of what happened during the California gold rush. For this reason, KushCo has been included in cannabis-related stocks in the list.
• Momo crowd money flows are positive in KushCo, but smart money flows are negative.
• As the chart shows, momo crowd money flows are positive in Canopy Growth CGC, -3.09% Please see “If you buy only one marijuana stock, this should be it.”
• As the chart shows, momo crowd money flows are extremely positive in Cronos CRON, +1.08% and Tilray TLRY, -2.42%
• In contrast, smart money flows are mildly negative in Aphria APHA, +2.24% Canopy Growth and Cronos.
• A producer of organic marijuana, Green Organic Dutchman Holdings TGODF, -0.36% has been removed from the list.
• As the chart shows, momo crowd money flows are positive in Aphria, Liberty Health LHSIF, +4.20% MedMen MMNFF, -0.66% and New Age Beverages NBEV, -1.73% Please see “What to do now if you own, or want to buy, marijuana stocks.”
• Momo crowd money flows are positive in GW Pharmaceuticals GWPH, -1.83% Scotts Miracle-Gro SMG, -0.16% and Constellation Brands STZ, -1.63% Smart money flows in these stocks are negative.
• Both smart money flows and momo crowd flows are positive in Corbus Pharmaceuticals Holdings CRBP, -0.12%
• Momo crowd flows are negative in Craft Brew Alliance BREW, +1.61%
• Smart money flows in Aurora Cannabis ACB, -0.48% are negative, but momo crowd money flows are positive.
• Momo crowd money flows are positive in marijuana ETF MJ, -0.48% but smart money flows are negative.
• Sentiment is a big driver of marijuana stocks. Investors ought to look for fundamental changes in addition to sentiment to be successful.
• The market capitalization of several marijuana companies are into the billions of dollars. It is nonsensical to trade these companies based on differences of a few million dollars in earnings or revenues, which are currently at low levels.
• The real reason behind the latest move has been short squeezes, not a change in fundamentals.
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Short squeezes
The real reason behind the recent rise in marijuana stocks is short squeezes. The reason behind the pullback is that this leg of short squeezes is ending. As of this writing, there are initial signs of another short leg starting.
A short squeeze occurs when short sellers either panic or are compelled to buy to cover shares that were previously short sold. This leads to a lot of artificial buying that is not based on fundamentals.
In the chart, under the short squeeze column, is shown the positioning for further short squeezes. For example, Cronos short squeeze money flows are extremely positive. This means that on even slightly good news, Cronos can experience a significant spike.
Rankings
The chart also shows the relative rankings of the five select popular marijuana stocks. These rankings are based on the six screens of the ZYX Change Method.
Risk-adjusted rankings are more useful for medium- and long-term positions. Non-risk-adjusted rankings are more useful for short-term or trade-around positions.
What to do now
It is worth repeating that the rise in marijuana stocks is primarily attributable to short squeezes. This leg of the short squeeze is ending. There is a distinct possibility of another short squeeze leg.
Arora’s 14th Law is directly applicable in this situation: To be successful at investing and trading, become a master of position sizing. Position sizing is critical to investing in marijuana stocks. In addition, using techniques such as trade-around positions is especially important.
There are seven stocks being held in The Arora Report marijuana portfolio at this time. Consider continuing to hold core positions in these stocks, assuming that you have already taken partial profits.
The plan is to judicially add new stocks and perhaps trim some of the core positions as appropriate.
Those who are holding positions larger than the core positions or trade-around positions may consider taking partial profits on any move higher.
Those who are simply doing short-term trades (not long-term investments) may consider taking profits on any move higher and consider jumping back in if another short squeeze leg starts.
Those not in marijuana stocks may consider waiting patiently for signals to buy select marijuana stocks. There is too much risk in buying these stocks today. Investors who have learned to respect risk will do significantly better in the long run compared to those who just get excited about the momentum and forget the risk.
Please also read:
To invest successfully in marijuana stocks, avoid this one thing
How to survive marijuana stocks’ rollercoaster ride
Seven reasons Big Tobacco is likely to make a move on the marijuana industry
Tilray is the poster boy of short-squeeze stock candidates — here’s how to find others
Marijuana beverages are the new thing, but investors should only take sips
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.