A Canadian research firm seems to be calling for a major drop in some Canadian marijuana stocks.
A look at the numbers reveals a much more complicated story though that reveals a lot about where investors should be putting their money.
Stuart Rolfe, an analyst for Veritas Investment Research, recently published a dire warning for some pot stock investors.
Rolfe said, the “tail end of the cannabis rainbow may be approaching much faster than investors realize.”
Sounds bad right?
It wouldn’t be the first time a prominent warning was sounded about marijuana stocks.
This is probably the most significant warning since CNN told investors to stay away from pot stocks “unless you don't mind seeing your portfolio do a Cheech and Chong and go up in smoke” back in 2015 right when the marijuana bull market was just starting.
They aren’t always right. Not by a long shot.
Besides, if we delve into Rolfe’s report, we can see this warning isn’t really warning in all cases.
You see, this report also contained “Price Targets” on a few of the leading marijuana stocks and if you look at those, the report is not really a massive industry wide warning at all.
The following list compares four leading marijuana companies, their current share price, Veritas’ price targets for them and percentage change need to meet those targets:
Company (Ticker Can/US) – Current Price – Veritas Target – Change to Hit Target
Aurora Cannabis (ACB/ACB) – C$10.08 - C$13.00 – 29% gain
Aphria Inc (APH/APHQF) – C$15.88 - C$19.00 – 19% gain
Canopy Growth (WEED/CGC) – C$53.63 - C$30.00 – 44% decline
Cronos Group (CRON/CRON) – C$10.92 - C$4.50 – 59% decline
As you can see, it’s a real mixed bag.
The most prominent call is on Canopy Growth which is currently the world’s largest marijuana company.
A drop of the magnitude targeted by Rolfe would mean a 44% drop wiping away about $4 billion of dollars in market value.
This is the same company Constellation Brands invested $4 billion in in the Canopy Growth already.
So what’s the likelihood of this big call on marijuana stocks being right?
Luckily, we have a historical test which can give us a good idea.
When it comes to big contrarian investment calls, you’ve got to ask yourself one question: does this sound crazy?
In other words, is the thought of a big correction in marijuana stocks unreasonable?
Of course not. A correction is quite reasonable. And it’s happened multiple times over the last couple of years.
That’s a very good thing for long-term marijuana investors.
History has proven that at the top of market and sector bubbles, any call of a drop – from correction to outright collapse – seems absurd to most investors.
You surely remember the heady days of 2007 when “housing prices only go up.”
At that point it was inconceivable to most people that any housing price drop was even possible.
We’re definitely not at a point like that in marijuana stocks yet because there are still big catalysts to drive marijuana stocks higher in the future.
The biggest catalyst would be if the U.S. legalizes marijuana after the elections.
If that happens, expect pot stocks to take another big upswing and bring the all those investors who have missed out on the current run jump on board.
The best move to make now is to invest in marijuana stocks tactically.
Focus on the individual situations.
The raging bull market that drove anything and everything related to the marijuana boom will fade, but the real values and special situations will do well as the marijuana industry progresses to a $100 billion+ industry.