All the hype and excitement surrounding the marijuana industry over the past few years has finally died down. Unfortunately for some investors, who got caught up in the hype and excitement, are now realizing what some knew all along; the marijuana industry has a long way to go before it achieves its full potential.
But, regardless of whether you were an ‘early’ investor in the industry or someone who has been sitting on the sidelines, now is the time to start getting serious about marijuana funds. Over the past three months, the five marijuana ETFs have lost 30% or more of their value. Obviously, this is due to the marijuana industry as a whole, seeing their stock values decline. However, this means some of the stocks in the industry which had been trading at ‘lofty’ valuations have come back down to earth quite a bit.
Over the last three months, Tilray is down 45%, Canopy is down 38%, Aurora is down 42%, Cronos is off by 40%. These are some of the big names in the marijuana industry and stocks held by the marijuana ETFs; ETFMG Alternative Harvest ETF (MJ), AdvisoreShares Pure Cannabis ETF (YOLO) , Cambria Cannabis ETF (TOKE), The Cannabis ETF (THCX), and Amplify Seymour Cannabis ETF (CNBS).
But why is now the time to start buying?
A number of reasons which we will get into, but the biggest one is like I mentioned above, the massive price decline we have seen the marijuana stocks fall and not just over the last three months. Since the start of the year, Tilray is down more than 68%, or off by 77% if you take its 2019 high on January 8th or over $100 per share. Canopy is down more than 61% from its high, while Aurora is down 63% from its high, and Cronos is off by 65% from its high in 2019.
When a stock takes a massive dive in less than a year, what typically happens is investors, along with analysts, begin to sour on the stock. The analysts start by cutting their forecasts on the stock price, and they typically downgrade the stock to hold or sell ratings. This causes potential investors to avoid these stocks. Investors who owned these falling stocks typically don’t want to throw good money after bad, so they hold or sell their shares, but certainly, don’t usually go rushing out to buy more.
These events cause the shares prices to either continue to drop or stabilize at a dramatically reduced price from where they previously traded.
So why buy when no one else is, and there is a potential for further stock price decline?
Simply because of the old saying that investors love to tell others but very rarely do themselves, ‘buy low, sell high.’ Or better yet, follow Warren Buffett’s advice of ‘being fearful when others are greedy and greedy when others are fearful.’ When no one else wants to buy a stock, or an industry in this case, be greedy and buy shares of these ETFs now that their prices have tanked. 2018 was the year of others being greedy when it came to the marijuana industry. At that time there was article after article and money guru near and far telling everyone how the marijuana industry was going to be worth $66 billion by 2025 when it only sits at less than $11.9 billion in 2018, or whatever other massive figure someone came up with.
The fact of the matter is, those figures could be correct, and we will see the industry grow by 24.1% a year over the next six years. However, the timing of that massive growth may just be delayed. Instead of mass adoption occurring in 2019, it may not happen until 2021.
The marijuana stocks I mentioned above declined in value in 2019, not because they have gone out of business or sales have decreased. Investors punished them because of the growth expectations, which were way overhyped and overblown, didn’t come to fruition in the very short period that some investors wanted it to happen.
I think most people would agree that it’s just a matter of time until marijuana is legal in all 50 US states and other parts of the world that still consider it to be an illegal drug. So, when that happens, the industry will experience a massive upside. The industry will grow and likely hit some of those growth figures investors and analysts had predicted a few years ago.
It's hard to say which individual companies will be the winners and the losers in the industry in a few years, so buy a marijuana ETF or two, and don’t worry about picking individual winners and losers. Just buy the ETF knowing in the short run it may continue to lose value, so average cost into it, and be willing to hold the position for years to come.
That is certainly what I will be doing.
Disclosure: As of this writing, Matt Thalman owned shares of ETFMG Alternative Harvest ETF (MJ), AdvisorShares Pure Cannabis ETF (YOLO), Cambria Cannabis ETF (TOKE), The Cannabis ETF (THCX), and Amplify Seymour Cannabis ETF (CNBS). This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.