The biggest gain in pot stocks this year…

Thursday, 19 December 2019
Melbourne, Australia
By Bernd Struben

  • Markets
  • The ups…downs…and ups of small-cap pot stocks

It’s been a tough year for the legal cannabis industry. But then the massive run up in share prices across most pot stocks was begging for a correction.

And correct they did.

Much of the heavy selling began in March. That followed on a big rebound from the wider stock market rout in the latter months of 2018.

The rebound was particularly big for leading pot stocks. The MJ Pure Play Index tracks the returns of 100 leading cannabis companies across the globe. And it gained an eyepopping 60.4% between Christmas and early February 2019.

Then things began to sour.

The catalyst that sent investors rushing for the exits was a healthy dose of reality.

Now the growth outlook for the nascent legal cannabis industry remains massive. More US states are looking to legalise medicinal and recreational use. As are Mexico and New Zealand. Not to mention Canberra’s move to decriminalise personal use in 2020. To name a few…

But it’s going to take time.

The legal and regulatory frameworks in Canada and the US are still being worked out. And competition from the black market — the only market there was until recently — remains intense.

Expectations from legal producers and investors alike were overly optimistic. At least as far as the growth timeline was concerned. Following a wave of disappointing earnings results in the first and second quarters of 2019, the sell buttons were triggered.

Which leads us to the investors who made some of the biggest gains in pot stocks this year.

The short sellers.

From Bloomberg:

Cannabis bears have cleared $993 million in mark-to-market gains so far in 2019, even after losing $132 million this month as stocks bounced off their lows, according to data from financial analytics firm S3 Partners.

Short exposure to the sector grew by $843 million or 35% in 2019, with most of that concentrated in 20 companies…

US$993 million (AU$1.4 billion) from short selling the biggest pot stocks.

That’s remarkable.

But notice that over the past month short sellers have lost US$132 million (AU$193 million) betting against pot stocks.

We’ll get back to that, right after a look at the markets.

Markets

Overnight, the Dow Jones Industrial Average closed down 27.88 points, or 0.10%.

The S&P 500 closed down 1.38 points, or 0.04%.

In Europe the Euro Stoxx 50 index closed down 6.28 points, or 0.17%. Meanwhile, the FTSE 100 gained 0.21%, and Germany’s DAX closed down 65.67 points, or 0.49%.

In Asian markets Japan’s Nikkei 225 is down 94.91 points, or 0.40%. China’s CSI 300 is down 0.32%.

The S&P/ASX 200 is down 13.62 points, or 0.20%.

West Texas Intermediate crude oil is US$60.92 per barrel. Brent crude is US$66.17 per barrel.

Turning to gold, the yellow metal is trading for US$1,475.88 (AU$2,153.31) per troy ounce. Silver is US$17.02 (AU$24.83) per troy ounce.

One bitcoin is worth US$7,189.20. That’s up 8.9% since this time yesterday. Which answers the query I posed yesterday when I wrote, ‘Time to “buy the dip”?

Of course with bitcoin the next 24 hours could see it reverse course just as easily.

Not even our crypto pros Sam Volkering and Ryan Dinse claim to be able to forecast cryptocurrencies’ daily moves. But their in-depth knowledge and market research can give you a crucial edge in getting ahead of the longer term price moves. (Details here.)

In the world of fiat currencies. the Aussie dollar is worth 68.54 US cents.

The ups…downs…and ups of small-cap pot stocks

As mentioned above, short sellers’ winning streak betting against pot stocks came to a grinding halt a month ago. That’s seen them lose AU$193 million by betting pot stock had further to fall.

Now allow me to take you back one month…and one day…to 18 November.

Here’s what I wrote about the cannabis sector in that instalment of Port Phillip Insider:

‘[W]ith the dust clearing from the latest round of sell-offs on disappointing third quarter earnings results, it may be time to reconsider…

‘[T]he worst of the slide looks to be behind them. And the case for upping your exposure to the cannabis sector…or getting in for the first time…is getting stronger.

Perhaps I also should have mentioned it looked like a good time to close out your short positions…

Going back to the MJ Pure Play Index. It hasn’t exactly shot the lights out over the last month. The index was up 5.9% on 12 December from the 18 November low. But it closed yesterday at virtually the same level.

However, after dropping 72.2% since 14 October 2018…a flat month still indicates to me that the worst of the correction may be over.

Indeed, in the small-cap space, some pot stocks are seeing their share prices rocket on successes with their medicinal cannabis applications.

Like Auscann Group Holdings Ltd [ASX:AC8].

Auscann’s share price soared 70% in intraday trading yesterday on news of success with its pharmaceutical cannabis products. Shares closed up 50% for the day.

As The West Australian sums up:

AusCann chief executive Ido Kanyon said the successful manufacture, testing and release of a commercial-sized batch of the [cannabinoid-based hard-shell] capsules marked a critical milestone for the company.

Cannabinoids tend to degrade over time when not protected but AusCann said its capsules, which have now passed Australian Therapeutic Goods Administration standards, are designed to perform consistently throughout the shelf life of the product.

Now after a big run up like that there’s some profit taking today, as you’d expect. At time of writing the share price is down 7% in intraday trading. Though that’s still up 39% from Wednesday’s open.

It shows you just how fast these small-cap pot stocks can move once they get a few scores on the board.

That won’t come as any surprise to long time subscribers of Australian Small-Cap Investigator.

Here’s what editor Sam Volkering wrote about Auscann when he recommended the stock to his readers way back in February 2017:

We think AusCann is the most exciting stock on the ASX involved in the production, research and sale of MM [medicinal marijuana] in Australia. They are poised for growth. And with their cutting edge research and critical business partnerships, they could become Australia’s leading MM company.

In such an early stage market AusCann already has the expertise and intellectual property to dominate the Aussie market.’

At that time, Auscann was trading for 21 cents per share.

Today the share price is 24 cents.

Now if you’re thinking a 14.3% gain over almost three years isn’t much, I’m with you. And if you’re thinking that until yesterday’s price surge Auscann was trading below Sam’s original recommendation price, you’re also correct.

But here’s the thing.

Readers who bought in at Sam’s recommendation in February 2017 could have sold for a 728% gain in January 2018. The stock dropped a bit from there, but readers could again have locked in a 704% gain in May 2018.

Now Sam didn’t issue a sell recommendation. Australian Small-Cap Investigator isn’t an active trading service. But those gains were on the table. Even if you were using a loose trailing stop-loss (which moves higher as the share price moves up), you could have done quite well with Auscann.

These same types of potential share price gains exist for every one of Sam’s small-cap pot stock plays. Just remember they can move down as quickly as they move up.

To learn more, go here.

Cheers,
Bernd