Marijuana Investors May Lose 90% Of Their Money Here! Marijuana investors may lose 90% of their money in Canada, so consider the really big prize elsewhere
Getty Images Marijuana presents a tremendous opportunity for investors over the next few years. Nave investors are excited. They think that all they have to do is to buy a few marijuana stocks and they will become rich. The reality is that professionals will pick their pockets, and many nave investors who are excited now will end up losing 90% of their investment.
I have witnessed the same phenomenon numerous times in my over 30 years in the markets.
Do not despair. With some skill, knowledge, patience, self-discipline and proper guidance, most investors have the potential to make millions, or a lot of money, in marijuana. Consider adopting a sophisticated approach. Sophistication takes more work but it is well worth it.
First things first, right now investors need to pay attention to the big Canadian marijuana nightmare ahead. The nightmare will cause big losses for the uninitiated but will present opportunities for the knowledgeable investor. Let us first build the requisite background to understand the nightmare and the opportunity with the help of a chart.
Read: A guide to pot stocks: What you need to know to invest in cannabis companies
Chart
Please click here for the annotated chart of Canopy Growth CGC, -0.94%Please note the following:
• Canopy Growth is a more solid company compared to other major marijuana companies such as Tilray TLRY, -2.97% Aphria APHQF, -2.81% Cronos CRON, -3.58% and Aurora Cannabis ACBFF, -0.55% To understand this in detail, please read “If you buy only one marijuana stock, this should be it.”
• The chart shows the Arora sell signal right at the peak of the last cycle in Canopy Growth stock. Subsequently, Canopy Growth lost over one-third of its value.
• The chart shows the Arora buy signal. Since the Arora buy signal, Canopy Growth stock has had a major run. We have taken partial profits.
• The chart shows the technical breakout.
• The chart shows Arora warning that the breakout was likely to fail. That call has now proven spot on.
• The chart shows the Arora sell signal for trade-around positions based on sentiment and smart money flows. For details, please read “What could hurt marijuana stocks? Too much love from investors.” The sell signal for trade-around positions has now also proven spot on. A technique that we use at The Arora Report often doubles the return and lowers the risk; in this technique, a long-term core position is accumulated at favorable prices and then the core position is surrounded by shorter-term trades. This is an easy-to-use technique, and all serious investors should consider using it. There are many nuances that are beyond the scope of this column but are included in the Trade Management Guidelines provided to The Arora Report subscribers.
• The volume on the failed breakout was higher than on the breakout itself. This is a negative.
• The chart shows the support zone. As long as this support zone is not broken, no lasting damage is likely to be done.
• Please note that marijuana stocks provide diversification because they often do not move with the Dow Jones Industrial Average DJIA, +0.21% and popular ETFs such as S&P 500 ETF SPY, +0.06% Nasdaq 100 ETF QQQ, +0.01% and small-cap ETF IWM, -0.70%
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Why did the smart money sell?
Why did the smart money sell when the news is positive — that Canada has legalized marijuana and the long-term potential is great? The answer is that the smart money always tries to get ahead of the curve — this is one thing that all investors should strive to do. The smart money knows the big Canadian marijuana nightmare ahead.
Canadian nightmare
Let us do some basic math in Canadian dollars, and the big Canadian nightmare will become obvious to you.
• The estimate is that 4.9 million Canadians spent an average of $1,200 in 2017 on marijuana. In 2017, the total marijuana and related products market in Canada was about $6 billion.
• In The Arora Report analysis, over the coming years the market will expand to about $8 billion.
• In our analysis, about $3 billion will be illegal trade, leaving about $5 billion for legitimate companies.
• Marijuana enthusiasts are projecting that marijuana prices will increase.
• In The Arora Report analysis, marijuana enthusiasts are wrong. In our analysis, after the initial surge, marijuana prices will steadily decline.
• In The Arora Report analysis, ultimately a big portion of the marijuana market will be commoditized.
• Ultimately, after-tax profits from legal marijuana in Canada will be about $700 million per year.
• The valuation of the 10 largest Canadian marijuana companies is about $50 billion.
• If all Canadian marijuana companies, big or small, are taken into account, the total valuation right now is about $125 billion.
• Since a big portion of marijuana will be commoditized, the average valuation for marijuana companies will ultimately be based on a price-to-earnings (P/E) ratio of about 15 or less.
• This gives the total ultimate valuation for Canadian marijuana companies to be about $10 billion.
• Go figure, the present valuation is $125 billion but the ultimate valuation of the Canadian marijuana market is likely to be $10 billion if significant international operations for these companies do not materialize. This means that marijuana companies, based only on the Canadian marijuana market, will lose 90% of their value.