The bull market on Wall Street has been going on for at least eight years. Late last week equities hit a small snag, and sellers stepped in early everyday and ruined a perfectly strong open. Even before Wednesday’s pop, they were still 2% away from the all time highs. Therefore, investors should be looking for stocks to buy rather than panic out just yet. Today, we are concentrating on cannabis stocks in particular.
If investors want to participate in the growth of cannabis stocks they can simply buy the ETFMG Alternative Harvest ETF (NYSEARCA:MJ). This would put a blanket bet on most of the top public companies. Today, however, we will approach it from a different perspective. I would rather focus on the cream of the crop – pun intended.
My priority is to avoid obvious mistakes. These usually happen when chasing runaway stocks. Today we will be doing the opposite, because our three cannabis stocks to buy are actually falling knives. With a bit of homework we can determine if there are reasons to expect a bottom. And even then, the entries should be in pieces. Taking partial positions makes sense when the indices are still at all time highs.
Meanwhile, pot stocks are doing relatively well considering the circumstances. This is true for all three of our contenders today. They are performing while being an illegal activity in the eyes of the U.S. government.
Cannabis stocks exploded in 2018, which made them have ridiculous valuations. I don’t mean from a profitability perspective, but from the price-to-sales aspect. They had multi-billion dollar valuations with just a few million of income. Luckily since then, they grew their businesses enough to bring that into better balance.
The three cannabis stock picks today are:
Cannabis Stocks to Buy: Tilray (TLRY)
Spoiler alert, TLRY stock is my favorite candidate of the cannabis stocks to buy. The prognosis for the long term looks attractive and I give this team extra kudos. This has nothing to do with the 2018 super spike that took it to $300 per share.
They made the best of their situation and became a large contender among the group. Their revenues now are 10 times larger than in 2017. Tilray’s price-to-sales is under 10, which is 14 times better than 2018. Clearly the investors in this stock have become more realistic with their expectations.
Sadly, this hasn’t helped the stock action this year. After exploding in February, TLRY stock lost 80% of its value. With today’s thesis I don’t aim to recapture the entire spike. The goal is to accumulate the stock old-school style. For the long term. If cannabis stocks are going to succeed, this one will be leading the pack.
Canopy Growth (CGC)
Canopy Growth’s financial metrics also improved tremendously but not as much as TLRY. In addition they had $4 billion advantage in the form of cash from Constellation Brands (NYSE:STZ). Nevertheless, management grew revenues eight time and improved the price-to-sales six folds.
Now that the investors in CGC stock have more humble expectations, it can bottom. There isn’t one hard line to count on but rather two support zones. Two 2020 corrections ended just below current prices. The most recent was in the fall of 2020, and before that in May.
Investors who are already long may have missed the panic point. Those looking to get into CGC can consider starter positions for the long term. This is the time to remember that conviction cannot be too strong. We don’t know what the stock markets will do near all time highs. These are cannabis stocks to buy but they don’t trade in a vacuum. If equities correct, these will fall further.
Cannabis Stocks to Buy: GrowGeneration (GRWG)
GRWG stock recently lost an important neckline at $28 per share. This could have triggered a bearish pattern with a target below $20. Therefore, investors would do well being cautious. But it may already be in a breakdown from higher levels those targets. These are viable starter positions since they don’t ring bells on Wall Street for individual stocks.
This team grew sales 23 times in the past few years. It also has the lowest price-to-sales of the three picks today. Arguably, that makes it the best bet of the bunch. However, it’s the chart that worries me a bit from two perspectives.
First, it’s the potential bearish pattern that may be unfolding from $28 per share. Also it is the one that has its next support cluster farthest from current price.
They are all falling knives, and the trick is to catch the one that is likely closest to the floor. Investors ideally should wait for physical evidence of this. But with stocks that move this fast, it may be too late. Starter positions and in moderation make for a sane method even if we don’t nail the bottom perfectly.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.