Pot Stocks Are Getting Crushed. What You Need to Know.
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Pot Stocks Are Getting Crushed. What You Need to Know.

By CONNOR SMITH
Fri, Feb 12, 2021 5:10amGrey Clock 2 min

What goes up, must come down. But not necessarily this fast.

Canadian marijuana stocks that posted staggering gains on Wednesday fell just as fast Thursday, while U.S. multistate operators, or MSOs, were dragged down, but fared a bit better.

Tilray stock (ticker: TLRY) fell 49.7% Thursday, erasing all its gains from the prior trading day. Aphria stock (APHA) closed down 35.8%. Those companies expect to close a merger in the first half of the year. Under the deal announced in December, an investor would receive about 0.84 shares of the combined Tilray for every share of Aphria that they owned. Aurora Cannabis shares (ACB) were down 23.5%, while Canopy Growth (CGC) fell 22.1%.

ETFMG Alternative Harvest (MJ), an exchange-traded fund with exposure to the pot business, fell 24.6% from its Wednesday close. The ETF is still up about 74.5% year-to-date.

Meanwhile, Curaleaf (CURLF), a U.S. operator that lists shares over-the-counter in the U.S., fell 7.2%. Peers Green Thumb Industries (GTBIF), Cresco Labs (CRLBF), and Trulieve Cannabis (TCNNF) were down between 6% and 8%.

Canadian pot stocks, especially, have rallied in recent months on a wave of sentiment-driven gains as investors bet on positive political developments. Meanwhile, U.S. growers, which would benefit from an improved legal landscape, have lagged their competitors that operate in the smaller Canadian market.

Cantor Fitzgerald analyst Pablo Zuanic told Barron’s in an email that the recent action in pot stocks involving Reddit traders makes it hard to predict day-to-day moves, especially with the more-liquid Canadian growers.

“A look at the [GameStop] stock chart should be cautionary,” Zuanic added. “That said, we continue to think the top US MSOs are attractively valued taking a long-term view, even though they will get some of the Canadian downdraft.”

Ironically, some observers last month likened the move in GameStop (GME) to Tilray’s brief parabolic jump in 2018. The WallStreetBets forum on Reddit was recently littered with posts about pot stocks. One of the top posts Thursday morning likened the recent action in Canadian pot stocks to a casino.

Zuanic said on Wednesday that the gap in performance between U.S. and Canadian licensed producers, or LPs, could signal interest from the Robinhood crowd. Robinhood users can’t trade over-the-counter stocks on the platform.

“Sure, the news flow backdrop has also helped (the notion the US will open soon and Canadian LPs will benefit; news about exports), but we think this does not explain the big delta in Canada vs. US performance,” he said. “We wonder if the average RH retail investor knows the difference between an MSO and an LP, and the very different fundamentals of both cannabis markets.”

Ihor Dusaniwsky, a managing director at short-selling analytics firm S3 Partners, noted on Wednesday that there’s also a short-selling angle at play. Tilray began the year with short interest at about 48% of shares available for trading, according to S3 Partners. S3 estimates a recent short interest at 23% of shares available for trading, implying a large amount of covering, which helps drive prices up.

Short sellers sell borrowed shares with the hope they can replace the stock by purchasing it at a lower price. Dusaniwsky notes that Tilray and Cronos (CRON) saw the largest yearly decrease in short interest as a percentage of shares available for trading. He added that the top 20 cannabis shorts in the sector were down $4.32 billion in net-of-financing mark-to-market losses in 2021 by Wednesday.

“The yearlong rally has spurred short squeezes in most of the top 20 most shorted stocks in the sector and we should see the squeezes continuing, especially if the potential for nationwide U.S. cannabis legalization continues to increase,” Dusaniwsky added.

As with GameStop, the traditional buy-and-hold investor might want to stay away until things cool down.



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These stocks are getting hit for a reason. Instead, focus on stocks that show ‘relative strength.’ Here’s how.

By KEN SHREVE
Wed, Jun 12, 2024 4 min

A lot of investors get stock-picking wrong before they even get started: Instead of targeting the top-performing stocks in the market, they focus on the laggards—widely known companies that look as if they are on sale after a period of stock-price weakness.

But these weak performers usually are going down for good reasons, such as for deteriorating sales and earnings, market-share losses or mutual-fund managers who are unwinding positions.

Decades of Investor’s Business Daily research shows these aren’t the stocks that tend to become stock-market leaders. The stocks that reward investors with handsome gains for months or years are more often  already  the strongest price performers, usually because of outstanding earnings and sales growth and increasing fund ownership.

Of course, many investors already chase performance and pour money into winning stocks. So how can a discerning investor find the winning stocks that have more room to run?

Enter “relative strength”—the notion that strength begets more strength. Relative strength measures stocks’ recent performance relative to the overall market. Investing in stocks with high relative strength means going with the winners, rather than picking stocks in hopes of a rebound. Why bet on a last-place team when you can wager on the leader?

One of the easiest ways to identify the strongest price performers is with IBD’s Relative Strength Rating. Ranked on a scale of 1-99, a stock with an RS rating of 99 has outperformed 99% of all stocks based on 12-month price performance.

How to use the metric

To capitalise on relative strength, an investor’s search should be focused on stocks with RS ratings of at least 80.

But beware: While the goal is to buy stocks that are performing better than the overall market, stocks with the highest RS ratings aren’t  always  the best to buy. No doubt, some stocks extend rallies for years. But others will be too far into their price run-up and ready to start a longer-term price decline.

Thus, there is a limit to chasing performance. To avoid this pitfall, investors should focus on stocks that have strong relative strength but have seen a moderate price decline and are just coming out of weeks or months of trading within a limited range. This range will vary by stock, but IBD research shows that most good trading patterns can show declines of up to one-third.

Here, a relative strength line on a chart may be helpful for confirming an RS rating’s buy signal. Offered on some stock-charting tools, including IBD’s, the line is a way to visualise relative strength by comparing a stock’s price performance relative to the movement of the S&P 500 or other benchmark.

When the line is sloping upward, it means the stock is outperforming the benchmark. When it is sloping downward, the stock is lagging behind the benchmark. One reason the RS line is helpful is that the line can rise even when a stock price is falling, meaning its value is falling at a slower pace than the benchmark.

A case study

The value of relative strength could be seen in Google parent Alphabet in January 2020, when its RS rating was 89 before it started a 10-month run when the stock rose 64%. Meta Platforms ’ RS rating was 96 before the Facebook parent hit new highs in March 2023 and ran up 65% in four months. Abercrombie & Fitch , one of 2023’s best-performing stocks, had a 94 rating before it soared 342% in nine months starting in June 2023.

Those stocks weren’t flukes. In a study of the biggest stock-market winners from the early 1950s through 2008, the average RS rating of the best performers before they began their major price runs was 87.

To see relative strength in action, consider Nvidia . The chip stock was an established leader, having shot up 365% from its October 2022 low to its high of $504.48 in late August 2023.

But then it spent the next four months rangebound—giving up some ground, then gaining some back. Through this period, shares held between $392.30 and the August peak, declining no more than 22% from top to bottom.

On Jan. 8, Nvidia broke out of its trading range to new highs. The previous session, Nvidia’s RS rating was 97. And that week, the stock’s relative strength line hit new highs. The catalyst: Investors cheered the company’s update on its latest advancements in artificial intelligence.

Nvidia then rose 16% on Feb. 22 after the company said earnings for the January-ended quarter soared 486% year over year to $5.16 a share. Revenue more than tripled to $22.1 billion. It also significantly raised its earnings and revenue guidance for the quarter that was to end in April. In all, Nvidia climbed 89% from Jan. 5 to its March 7 close.

And the stock has continued to run up, surging past $1,000 a share in late May after the company exceeded that guidance for the April-ended quarter and delivered record revenue of $26 billion and record net profit of $14.88 billion.

Ken Shreve  is a senior markets writer at Investor’s Business Daily. Follow him on X  @IBD_KShreve  for more stock-market analysis and insights, or contact him at  ken.shreve@investors.com .