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Summary

  • 12/12 Marijuana stocks are priced lower as of Friday, May 8th than they were the day before Yellen announced possible interest rate hikes.
  • Because investors are unable to handle bad news, these twelve companies all have dropped in value dramatically.
  • Although nothing has essentially changed since March 18th, just as positivity begets positivity, negativity begets negativity in the marijuana sector, and value suffers for it.

What Happened to the Marijuana Industry?

From January 1st to April 1st, there were 4 major catalysts fueling investor optimism for the future of the marijuana industry:

Positive catalyst #1: Colorado's legalization of marijuana went into effect January 1st.

Positive Catalyst #2: Canada's Medical Marihuana Purposes Regulations (MMPR) program that allows for corporations to buy, sell, destroy, export and import marijuana was to go into effect April 1st. This legal reform essentially has made it possible for investors to "invest" in corporation selling marijuana. MMPR is currently in effect, and MMPRs like Tweed Marijuana Inc. (TWD) are selling medical marijuana.

Positive Catalyst #3: Uruguay was to become the first country to legalize marijuana. As of May 6th, Uruguay has unveiled a regulatory framework for the world's first fully-regulated market.

Positive Catalyst #4: To date, 21 out of 50 states in the US have enacted laws for the legalization or decriminalization of marijuana.

Although marijuana is still considered federally illegal in the US, Canada's MMPR program has given a chance for investors to bet on the future of marijuana. As of April 1st, investors of Canadian medical marijuana MMPRs are able to directly invest in marijuana sales. The Canadian market, while profitable, shrinks in comparison to the value of a US legalized market. This future outlook on the possibility of a legalized market has galvanized the optimism we saw from January 1st to March 18th. But then something happened.

Investor Exuberance

ATT data by YCharts

  • Vapor Group Inc. (OTCQB:VPOR) an obscure vaporizer manufacturer in Florida became the stock of the year gaining nearly 59,070% percent.
  • Canada's Medical Marihuana Purposes Regulations (MMPR) program was the real story of the year. Set to take effect April 1st, Canada has given investors the opportunity to directly invest in the sales of dried herb marijuana. Companies touting objective to enter MMPR arena rose +1,000%. Enertopia Corp. (OTCQB:ENRT) (TOP) rose 1,300%, Abattis Bioceuticals (OTCQX:ATTBF) (ATT.CX) rose 12,200%, and Creative Edge Nutrition Inc. (OTCPK:FITX) rose 1,700%.
  • GW Pharmaceuticals (NASDAQ:GWPH) and Medbox (OTCQB:MDBX) had impressive gains of over 60%, which of course is modest in contrast to the other marijuana players.
  • Medical Marijuana Inc. (OTCPK:MJNA), not so impressive considering that 2 years ago its gains influenced the rest of the sector.
  • Growlife Inc. (OTC:PHOT) gains seem unimpressive, considering it has been perceived as the #1 stock in the sector.
  • Finally, Advanced Cannabis Solutions Inc. (OTC:CANN) and Terra Tech (OTCQB:TRTC) give investors a nice return on their buck with CANN almost hitting 1,000% in gains.
  • And Medican Inc. with very little institutional coverage managed to run up almost a 1,000% as well.

Putting money in the marijuana industry felt great. Everyone was making enough to retire young. The 12 stocks I compare here are not necessarily the top in the sector. These companies make it to the 'Tier 1' list either because of their popularity, that it traded above a dollar, or because of their notoriety in the sector.

If you bought any marijuana related stock on December 31st, 2013 prior to the passage of Colorado's legalization marijuana bill, by March 20th, 2014 you would have seen some unbelievable returns.

So what happened?

I count #5 "tsunamis" that have hit the market pretty strongly. As investors, we rarely assess the past in light of the present. We are correctly told that past performance does not determine future value but we mistakenly also assume that past performance doesn't affect current perceptions. And it does. As each tsunami hit the sector, investors refused to reflect in a rational and constructive way. Rather, investors bullied each other into "buying dips" rather than protecting their portfolios.

The color red now stains our brokerage accounts. And as many of our investments continue to bleed, we don't mend the gashes but keep carving away, praying that the carnage will stop. To mend the wounds we need to recognize that the sector was in a bubble and it burst. It doesn't mean the stocks won't return to their prior valuations. It means that the valuations we were giving our investments were too preemptive. We were a few years ahead. Some of the players in this industry have genuine value. But we have to have more patience. By 2018 the US and Canada marijuana market could be returning $7.3 billion in revenues.

I have a developed a chronology to mark five different points where investor confidence was damaged. For the future of the industry, we need to regroup and reflect whether these catalysts justify short-term caution or long-term bearishness.

Marijuana Stocks, A Series of Unfortunate Events

ATT Chart

  • It doesn't take much to kill investor confidence. The Lehman Bros crash caused a domino effect in 2008 that sent the global economy into a tail spin.
  • But the marijuana industry has been more resilient given the circumstances. After five strong tidal waves, only GWPH has managed to have capital appreciation. Since March 21st, Losses here range from -12.1% to -81.2%

Tsunami #1: Yellen

ATT Chart

ATT data by YCharts

  • Yellen to the Court Injunction, March 18th to March 21st.
  • The S&P 500 was slightly phased by this news. But Marijuana stock investors clearly overreacted.
  • A mini hit on the sector. CANN (-23.2%), MDCN (-20.2%) TRTC (-21.9%), and PHOT (-14.8%) are hit hardest by this news.
  • Investors in MJNA (2.33%) and MDBX are either indifferent or feel positive about this news
  • Both VPOR and ATTBF react accordingly but bounce back for a 7.58% gain and an 8.85% gain.
  • ENRT, GWPH, and CANV, and FITX all stay above double digit losses.

Tsunami #2 The Court Injunction

On March 21st, no less than 2 weeks before Canada's MMPR would take effect, a federal court ruled that 25,600 patients with Medical Marijuana Access Regulations (MMAR) licenses could continue growing marijuana for personal use.

  • Court Injunction to CANN's halt, March 21st to March 27th.
  • TRTC (21.14%) seems to react positive to the news. But in fact, this is just a recovery from investor's overreaction to the Yellen halt. Investors are confident that the injunction has no bearing on the success of TRTC
  • Double digit downers: ENRT (-45.6%), ATTBF (-41.5%), CANV (-30.2%), MDCN (-18.6%), MJNA (-12.8%) and FITX (-10.4%). It is unclear why MJNA joined the fall.
  • GWPH (-9.83%) nearly hits double-digit downs. PHOT, VPOR, and MDBX continue to slide.
  • Conclusions: Marijuana investors don't take bad news well.

Tsunami #3 Advanced Cannabis Solutions Halt

ATT Chart

ATT data by YCharts

  • Chart from March 27th to April 8th.
  • TRTC (-31.1%) drops back to Yellen lows.
  • ATTBF (1.39%) is resilient to the halt.
  • MDCN (51.32%) investors decide that CANN halt has no bearing on its future in Canada.
  • ENRT (-20.2%) drops further along with FITX (-19.1%), MJNA (-17.6%) GWPH (-11.1%), MDBX (-10.8%), and PHOT (-9.38%)
  • The hardest hit by this VPOR (-61%).
  • ENRT and ATTBF did recover slightly in a last ditch run before April 1st.
  • Conclusions: stocks with a lot of fanfare do not take bad news well.

Tsunami #4 The Wolf Bubble Bursts

ATT data by YCharts

  • Chart from March 25th to April 10th.
  • CANN getting halted and VPOR bursting clearly put a damper on the sector.
  • After hitting a peak of 0.418 p/s for total 70,000% gain YTD, VPOR's drop hurt.
  • ATTBF joined VPOR for the nose dive, losing 40.5% of its value. Nevertheless, as we saw above, it did not drop further after CANN's halt.
  • Conclusion: We can see that some of the more hyped plays this year are more dramatically affected by bad news. What does this mean for your investment?

TSUNAMI #5 PHOT Halt: April 10th to April 23rd

ATT data by YCharts

  • Chart from April 10th to April 23rd.
  • Although PHOT was considered one of the most beloved in the sector, the drops here are considerably less than expected in contrast to the other "tsunamis."
  • We see that ATTBF was the most negatively affected by this news, taking a 30% dip.
  • The three losers were: VPOR (-29%), ATTBF (-23%) and MDCN (-23%).
  • And GWPH (29%) makes a big turnaround, most likely due to the positive institutional sentiment.
  • Somewhat disturbing, Tweed's IPO was a flop, even though it is the only company in the sector legally allowed to sell medical marijuana.
  • And I find it very surprising that FITX gains 27% despite being most closely tied to PHOT. A lot of PR and IR helped FITX disassociate from the PHOT meltdown. I am sure FITX investors would argue that is a testament to FITX's value and the confidence people have in FITX.

PHOT resumes trading. Any Tsunamis left? Sell in May?

  • April 23rd to the present. Despite neither CANN nor PHOT are being investigated after their halts, and MMPRs are finding customers, investors continue to lose hope.
  • The most anticipated Marijuana stock of the year, Tweed Inc., continues to slump. It has dropped -11.5% despite announcing that demand for marijuana has been higher than expected. It seems that no one reads the memos.
  • Since PHOT has resumed trading, 11/12 stocks that we have been covering continue to slip. FITX is the only exception despite the fact that it currently does not have any marijuana sales.
  • PHOT's -78% is painful to look at. Unlike CANN, PHOT has not bounced up from its fall.
  • Conclusions: Investors behave irrationally.

Reviewing The Wreckage

  • March 18th to the present.
  • 12 out of the 12 companies we have been looking at have seen losses since the Yellen Tsunami, ranging from GWPH -5.21% to PHOT's -83.9%
  • 11 out of those 12 are down double digits and 10 of those are down more than -30%.
  • Nothing much has changed to the marijuana besides perception.
  • Conclusions: Investors behave irrationally.

The question you should ask yourself after looking at these charts is, what did you expect? When the value of a stock rises rapidly because of pumps and not intrinsic value, maintaining those prices will be impossible.

^NDX Chart

^NDX data by YCharts

  • The Nasdaq (^NDX) and Gold and Silver joined marijuana investors for the dive, sort of.
  • But for the most part change has been slight. Life kept on going.
  • NYSE Composite (^NYA) rebounded for a nice 1.58% gain
  • PHLX Gold and Silver Index (^XAU) seemed to be the only index severely affected by the Yellen remarks.

Reflexivity and The Irrational Investor Theory

The message is: investors you create your own reality. Because the illiquid nature of these stocks it is very easy to manipulate the price, every buy and sell moves the price. These stocks have a tendency to overreact to news, positively or negatively.

The stocks that I listed here are not necessarily the "top" players that will lead the industry. Nor are they the most followed stocks. These are companies that I try to follow because I feel their movements can affect the rest of the players.

Not one company out of these 12 is priced higher than it was on March 18th. What should you take away from this? While one might think it is sell on the moment you hear bad news, in fact, it is don't buy unless you plan to hold. Investors who bought these stocks dreaming of gold and now look at their portfolios as a bloody massacre should realize that only they are responsible. We drove these prices up and now we drive them down. Simple as that. We bought high and sold low. This causes illiquid securities to be devalued.

Writing about the marijuana industry is fun because one cannot use the normal metrics to discuss it. But I think understanding why certain stocks gain value and others don't gives us profound insight as investors into how markets operate. Although underlying value is always nice, perception and sentiment rule, at least in the short term.

What the last few months teach us is that the value of stock ownership isn't based on the historical underlying value of a stock it is based entirely on the perception that stock will be worth sometime in the near future. Although this might be obvious or well-known to some, I think it is easy to forget this basic fact about investing. So much so marijuana stocks rising nearly 70,000% in value within a matter of months indicates that capital gains don't have to be related to the value of the company at all.

Conclusions

So, what's changed? As far as I can tell, nothing. MMPRs are selling marijuana, legalization is slow-going but moving along, and CANN and PHOT are not under investigation. So, what happened?

I am a contrarian. I buy when stocks are down and sell when stocks are up. Investors like to do the opposite. I see this as a buying opportunity. Since Yellen, the halts, and bubbles bursting, I've done nothing but wait for stocks that I like to fall hard enough to find a great buying opportunity. Some of the stocks here are still 'overvalued' and may continue to fall. Others I think have great potential that investors have yet to notice. The sector can continue to slump as we go into the summer. But I am going to do my due diligence and find the real gems. And no matter what, I will always avoid the hyped plays.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Marijuana Stocks: Half A Year In Review Part 1, Tier 1