Canadian Weed Stocks are the subject of “Friday’s Big Fail”.

On February 1, 2018, The Canadian Marijuana Index – which tracks stocks focused on the marijuana and hemp industry – dropped 11%.

Hydropothecary Corp. (CHCX.CA) experienced the smallest loss (- 6.3%), while Namaste (N.CNX) experienced the biggest loss (- 21.7%).

The winners were…

Oh.

Sorry.

There weren’t any.

Why did Namaste take a worse beating than other Canadian Weed Stocks?

Maybe because they announced a “bought deal”, issuing 13,726,000 shares at $2.55 for gross proceeds of $35 million. It definitely wasn’t a good day to dilute.

But Namaste is not a dog shit company.

On January 29, 2018 Namaste announced record-breaking quarterly sales of  $4.9 million, representing a $2.8 million or 136% increase in comparison with the same quarter last year.

Gross margin also increased to 32% for the three months ended on November 30, 2017, in comparison to 28% for the Company’s quarter ended November 30, 2016.

Namaste is focused on “expanding sales in existing territories as well as in emerging markets such as Mexico and Brazil while reducing sales exposure in the United States.  The Company also sold its US assets and operations as a strategic decision to eliminate risk related to US market exposure.”

Namaste distributes vaporizers and smoking accessories through e-commerce sites in 26 countries and with 5 distribution hubs located around the world.

After the Namaste stock started to plummet an unholy war broke out on the message boards between the “weak hands” and the “True believers”:

Namaste and other Canadian Weed Stocks aren’t failing because they’re inept or fraudulent, they’re failing because they are overbought – and there is negative news swirling in U.S, that might’ve spooked investors in Canadian weed stocks.

On January 31, 2018, we learned that the U.S. cannabis fund, ETFMG Alternative Harvest – which has raised more than $350 million in the last month – is being reviewed by Bancorp, the custodian bank that holds the ETF’s assets.

“If Bancorp decides against continuing its relationship with Alternative Harvest, the fund could face closure.”

In a recent article, Chis Parry gently suggested that it might be a good time for weed investors to take some money off the table:

“I’m not saying Namaste is crap. It’s a nice little earner,” wrote Parry, “and good for them for saying words that made guys on the internet believe in fairies. But at some point, the grown-ups need to loudly announce, ‘I’M GOING TO TURN THIS CAR AROUND IF YOU DON’T SMARTEN UP.’

You’ve made your money. You put a few thousand in and it became twenty thousand or fifty thousand. Take that money back now and record your win…

Look, I could sit here and cheerlead this stuff and make money doing it. Everyone wants to be told the fun will never end. None of my client companies want to see me saying, ‘Sell half your stake’ but that’s what we’ve been doing because IT’S THE RIGHT THING TO DO.”

Are Canadian Weed Stocks in a bubble?

On January 15, 2018 James Bagnall, an Ottawa Citizen reporter and author of 100 Days: the rush to judgment that killed Nortel” – provided some historical context on that subject.

“Are we in a pot stock bubble?” wrote Bagnall, “Yes, but it’s still relatively constrained because it’s based on something real — that in the absence of studies showing theoretical health issues, millions of Canadians will buy cannabis products year after year.

Consider what a real stock market bubble looks like. When optical components maker JDS Fitel of Ottawa first issued shares to the public in 1996 it did so at just $12 a pop. If you had plunked down $12,000 to buy 1,000 shares, your investment would have been worth $2.6 million at the peak of the telecom madness in 2000. Bottom line: each dollar invested in 1996 would have returned $212.90.

In sharp contrast, investors could have acquired Canopy Growth shares in its first year (2014) for $2 each. Even if you had been fortunate enough to sell them last week at the peak, you’d have received $44 per share.  Each dollar invested would have earned you $22.

That would have been sweet, to be sure.  But investors today should take comfort in knowing the exuberant spikes in marijuana stock shares still bear no relation to the fever that gripped Ottawa optical technology firms in 2000.”

When to exit an over-bought sector?

There’s a famous anecdote about billionaire Joe Kennedy – who created most of his fortune in the roaring 1920s when the stock markets had little regulation.  Mr. Kennedy sold his entire portfolio days before the 1929 crash.

“Joe Kennedy exited the stock market in a timely fashion after a shoe-shine boy gave him a stock tip. He figured that when the shoe-shine boys have tips, the market is dangerously overheated.”

In other words, when the “dumb money” floods your sector it’s a red flag.

One of the easiest ways to spot this red flag is to look at the tone of the advertisements in your local newspaper.

See this one in 1928:

Who is it aimed at?

Sophisticated investors?

Or shoe-shine boys?

What about this one from late 2017?

Millennials have experienced two major financial crashes – when the dot.com bubble popped in the early 2001 – and the stock market crash in 2008.

Weed stocks have been credited with drawing gun-shy millennials into the stock market.

“Our new accounts opened by millennials are up 72% year-over-year,” stated TD Ameritrade CEO TIM Hockey in a recent Business Insider interview. “Clearly, the two biggest stories of the quarter were the sectors of cryptocurrency and cannabis. Those are two sectors that didn’t even exist a few years ago. That has driven the skewing of our new accounts opened to the younger trader and younger investor.”

The millennials we talk to are definitely not the “dumb money”.

They research, think, find dissenting opinions – and pepper us with pointed questions.

For the record, we still like cannabis.

But on February 1, 2018 – like every other weed investor on the planet – we lost money.

Two days ago, we were gracious about that.

Today, we don’t feel so gracious.

That’s why Canadian Weed Stocks are the subject of “Friday’s Big Fail”.

Written By:

Lukas Kane

Lukas Kane was previously the CEO of a North American investment news syndicate. He was also the Communication Director for a consortium of publicly traded companies. A Senior Writer at Equity.Guru, Mr. Kane writes about mining, cannabis, energy, technology and biotech.

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