A few weeks ago, I shared “My Technical Take on Aurora Cannabis, Cronos and Tilray.” At the time, they were all on my “avoid” list. And since then shares of these big-and-popular pot stocks have fallen — around 12% for Aurora (NYSE: ACB), 10% for Cronos (Nasdaq: CRON) and 26% for Tilray (Nasdaq: TLRY).
Now, I’m not taking credit for forecasting the price declines of these specific stocks.
In fact, the broader cannabis space has been suffering through a pullback. The industry’s most liquid ETF — the ETFMG Alternative Harvest ETF (NYSE: MJ) — is down around 8% since mid-May. And in full disclosure, I’m currently building a portfolio of cannabis “seed” investments… those, too, have pulled back some.
I’m still incredibly bullish on the cannabis space as a whole. But I think it’s important for new cannabis investors to know what they’re getting into…
One Wild Ride
Cannabis stocks are volatile.
You expect that from the smallest and most speculative pot stocks. But even the big industry-leading ones are far more volatile than what you’ll find in the S&P 500.
Let me show you what I mean…
First, realize that there are currently about 250 to 300 publicly traded stocks that can be called “pot stocks.”
Of those, there are only 25 stocks that have an average daily trading volume equal to $10 million or greater. In comparison, there are only three stocks in the S&P 500 that trade less than $10 million a day — most S&P 500 stocks trade far more.
We’ll only be considering the volatility of the biggest pot stocks…
We’ll also have a look at two time periods. Cannabis stocks reached a mid-year peak on March 14 and have been pulling back since. Let’s look at summary statistics since then:
|Since March 14 Peak|
As you can see, the average “big-and-liquid” pot stock has lost 3.4% since mid-March, whereas the S&P 500 has lost a lesser 2.4%.
What’s more, the standard deviation of those 25 pot stocks has been three-times greater than S&P 500 stocks! And you can see these extremes more closely by considering the minimum and maximum returns — one pot stock is down 50%, whereas the worst S&P stock is down a milder 38%… one pot stock is up nearly 130%, whereas the best S&P stock is up just 59%.
All told, these statistics clearly point to pot stocks being far more volatile than S&P 500 stocks — and remember, these are the biggest, most heavily traded pot stocks out there!
Of course, we should also have a look at year-to-date numbers…
Here we see essentially the same conclusion…
The average 2019 year-to-date return of the 25 pot stocks I analyzed comes in at an impressive 48%, trouncing the S&P’s 11% return.
With that 4.5-times greater return comes a 4.7-greater standard deviation — which means far more variability around the average.
Though, interestingly, it appears pot stocks have offered a good trade-off between “max” winners and losers this year. The worst pot stock is down 49% — just 1.3-times worse than the worst S&P stock. While the best pot stock is up 278% — more than three-times better than the top-returning S&P stock this year.
Is Volatility a Bad Thing?
I’ve long said that volatility is neither good nor bad. It all depends on your comfort level and if you know how to harness the good aspects of volatility, while also mitigating the bad aspects.
In Cycle 9 Alert, we routinely trade highly volatile instruments (options). But since we put what I call the “asymmetry of risk and return” in our favor, we’ve been able to establish a long track record of success.
Yes, some of our volatile investments blow up in our face. But since our winners are bigger than our losers, we come out on top in the end! And as I’m building a portfolio of cannabis “seed” investments, I expect much of the same experience…
Pot stocks will be far more volatile than your average S&P stock. Many pot stocks will lose 50% or more in short order. And more than a few will go all the way to zero. But the upside potential for many of these highly volatile pot stocks is enormous — far greater than anything you’ll find among the major market averages.
So, the real question is: Can you stomach the volatility?
Cannabis is known to settle the stomach, but cannabis stocks may not! In the end, I think all serious investors should figure out a way to gain exposure to the cannabis space, despite the excessive volatility. And I’m looking forward to sharing a few techniques I have up my sleeve to do just that.
The first step is simply acknowledging how volatile these stocks can be…
Once you’ve done that, you can establish an action plan… More on that to come.