Even those of us who warned about it have watched new low after new low.
But we’ve got some good news for you.
This week we saw the first major sign of a bottom in cannabis stocks.
In a moment, we’ll look at this tried-and-tested bottom indicator. How it has signaled bottoms in cannabis stocks. And how it’s a great signal it’s time to buy a stock after a long drop.
Before then though, we’ve got to make one thing clear.
We’re not saying this is the absolute bottom in cannabis stocks.
There are still a few weeks of summer left to go. Light volume can lead to some major up and downswing.
Also, the next big catalyst of cannabis stocks – Canada finally opening the market for cannabis infused products – is still a few months away.
Despite that, we still saw a major sign the bottom in cannabis stocks is here.
Of course, most investors are going to totally miss it. And they’re going to miss massive rally that’s coming.
But if you follow along for few minutes, you are going to be in position for an extremely lucrative ride in a few weeks.
Last Time This Happened Cannabis Stocks Soared 65%
First, let’s start with a quick snapshot of where the cannabis sector is today.
The last few months have been tough for most cannabis stocks. And it’s been cataclysmic for Canadian cannabis stocks.
Take a look at the Canadian Marijuana Stock Index and you’ll see what I mean.
This chart shows the Index over the last year:
The worst kind of decline is slow and steady.
But there’s more than just pain in this chart.
It also highlights spots where selloffs have ended, and big runs have begun.
For example, the Index is currently at 432. Or right about the same level when two major upturns began.
If you go back to last August, you’ll see the Index soared 82% from about where it is now.
At the time the $4 billion investment in Canopy Growth (CAN:WEED / US:CGC) from Constellation Brands (STZ) sparked a rally which rolled right into Canada’s legalization.
After that catalyst came and went, the only way for Canadian cannabis stocks to go was down.
And they did go down. The Index fell legalization peak of 876 to a low of 425 (a 52% decline) in about 10 weeks.
But when the Index reached that point (which is also where it was about now), it was deep in “oversold” territory.
After the tax-loss selling season ended, the Index rallied from 425 to 702 (a 65% surge).
But again, without another future catalyst to keep investors chasing cannabis stocks, the only way to go was down.
Again, that’s what happened.
The Index fell 38% to the point it is today and where it bounced back big from twice in the last year.
So that’s the set up.
We’ve got a long and sustained selloff with a major catalyst coming in a few months.
It’s an ideal combination which has created huge gains in the past in cannabis stocks.
We’ve just got to get to the bottom. Right now, it looks like we’ve gotten to that point. Because this week we saw something that only happens when a stock or sector has hit the bottom.
Bad News (For) Bears
The bottom indicator we’re looking at now has to do with the trading in Organigram (CAN:OGI / US:OGI) shares this week.
Organigram was one of the first Canadian cannabis companies to list on the public markets.
It has grown into Canadian cannabis mid-major with broad distribution across the country.
It is also one of the first of the top-tier Canadian cannabis companies to report quarterly earnings.
That’s the key in all this.
Organigram released its latest quarterly report on Monday.
In our frankest view, the results were bad.
Organigram revealed it generated $24.8 million in net revenue in the quarter covering April, May, and June of 2019.
We realize that’s up 628% from the same quarter a year ago. But that should be expected because it was before recreational use cannabis was legalized.
The real problems with Organigram’s numbers were twofold.
First, the revenue number was below expectations. The consensus estimate was for $29 million in net revenue. Organigram came in more than $5 million short of that.
Second, this quarter was down from the last quarter. Organigram clocked in $26.9 million in net revenue for the quarter covering January, February, and March.
That’s why the only conclusion we could make is that it was an overall bad quarter.
Now here’s the good part.
This Only Happens At The Bottom
After a disappointing result like that, Organigram shares should fall even more.
In this case, they didn’t.
After the initial shock of the report, Organigram shares started to tick up. They closed the day up from Friday’s close.
The next day they kept climbing.
The day after that they kept climbing too.
Altogether, Organigram shares rose 20% from post-announcement bottom on Monday to the top on Wednesday.
Why’s that good?
Well, it shows there aren’t many sellers left (or those who wanted to sell are already out) and that expectations are now too low.
That’s a combination we consistently at bottoms in both stocks and sectors.
And if all you did was wait to buy stocks that go up on bad news, you’d do extraordinarily well investing in the long run.
Often, we warn about stocks being “priced for perfection” and they plummet when news is good, but not good enough.
The same is true in the inverse too like it was here with Organigram.
Update: “The Dip Before The Rip”
This is a tremendously positive sign at a critical time.
We all know in a few months Canada will be opening the market extract-based and infused cannabis products.
That single move alone will double the growth potential for Canadian cannabis companies.
Meanwhile, Canadian cannabis stocks are priced for the worst.
After all, if a stock like Organigram can rise 20% on bad news. Just imagine what it will do when the news is good or great from sales data from edibles, vapes, and other cannabis products.
We are hesitant to declare a bottom. But this is a good sign it’s here and it the window to “buy low” before the Canadian extracts and edibles rallies gets into full swing.
High profits,
The Seed Investor