There is a laser-like focus on pot stocks that has taken investors for one of the bigger roller-coaster rides in recent memory.
The trend toward the legalization of weed has created “reefer madness” in the price action of several pot stocks, where volatility is about as extreme as anyone could imagine. Canada has taken the lead on making pot legal throughout the entire country. Marijuana use in Canada will be legal in mid-October after legislation cleared regulatory hurdles in June.
There are several ways to invest in the potential marijuana boom. Many are plays for recreational marijuana, which will boom if legalization goes as expected. Many are medical plays, which are incredibly likely to be successful, but the upside is smaller. The last way is to invest in companies that happen to have a lot to gain from the marijuana industry but aren’t necessarily reliant upon it for success.
The headlines have caused these stocks to soar. While there are many micro-cap pot stocks that trade only in Canada, a handful now trade as American Depository Receipts (ADRs) and are cleared to be owned by most of the major brokerage firms. American investors eager to get in on the next gold rush have pounced on these recently listed ADRs in what resembles bubble-like panic buying, sending most of these stock valuations sky-high. There is even an exchange-traded fund, the ETFMG Alternative Harvest ETF (MJ), that has become wildly popular of late.
As a result, the hottest names in the sector have soared and crashed in recent weeks, but like any shakeout, the shorts got crushed. The panic buyers that paid top dollar are seeing their investment capital go up in smoke and the current pullback is going to define which investors have the stomach for the price swings. Of the names most coveted, Canopy Growth (CGC) shares have doubled this year and Tilray Inc. (TLRY), which made its debut in July, rallied 500% following Labor Day to hit $300 before getting knifed back down to $130 as of last Friday.
A major catalyst that is fueling the pot stock rally and bringing credibility to the whole investment theme is the interest and entry by Fortune 500 companies into the space. This is what I deem the smart money trade in what is a highly speculative sector where there will be a few big winners and many more even bigger losers. Marijuana stocks spiked higher after a report that the biggest beverage company of them all is looking to get into the industry.
Aurora Cannabis, a Vancouver, Canada-based cannabis producer, rallied more than 20% in trading after Bloomberg reported Coca-Cola (KO) is in talks with Aurora to develop weed-infused beverages. Any partnership between the two likely would develop health-focused beverages aimed at easing inflammation, pain and cramping, the report said. Coca-Cola offered this statement:
“Along with many others in the beverage industry, we are closely watching the growth of non-psychoactive CBD as an ingredient in functional wellness beverages around the world. The space is evolving quickly. No decisions have been made at this time.”
Other big-name companies that have strategic plans and partnerships in place include Scotts Miracle-Gro (SMG), a leader in the hydroponics industry. The company is a dominant player in the horticultural supplies that growers depend on for producing high-quality cannabis. Though the move in marijuana stocks is mostly headline-driven thus far, Coca-Cola wouldn’t be the first beverage titan to test the waters with an investment in a cannabis producer.
Corona beer maker Constellation Brands (STZ), for example, upped its bet on the industry last month, announcing an additional $4 billion stake in Canopy Growth (CGC). Molson Coors (TAP), too, announced in August that its Canadian unit is entering into a deal that will develop cannabis-infused beverages in Canada. Molson Coors Canada is partnering with Canadian cannabis producer Hydropothecary Corp. (HEXO) to create a joint partnership “to pursue opportunities to develop non-alcoholic, cannabis-infused beverages for the Canadian market following legalization.”
From my vantage point, professional money is targeting the blue-chip companies, with Constellation Brands seeing the most recent interest. Depending on how the market for marijuana-based products develops, it might prove lucrative to own a basket of these stocks that includes both the blue-chip stocks that are partnering up with the pot pure play companies and then pairing that high-quality basket by taking a position in the ETFMG Alternative Harvest ETF (MJ), which owns all the hottest pot stocks that are getting the headlines.
One thing that is for sure is that volatility will be extremely high with trading in the marijuana sector, making for very juicy covered-call and naked put strategies. I’ll be advising my subscribers within my Quick Income Trader service as to just how to play specific stocks with corresponding options strategies to reap the biggest the gains the sector has to offer. While the temptation of several-fold gains will entice most option traders into buying inflated short-term out-of-the-money call options, the professional smart money will be selling expensive option premium back to the market for consistent profits, feeding off the short-term greed of others.
Take a tour of Quick Income Trader by clicking here to make good use of your trading capital by targeting trading strategies that are being used to create immediate cash deposits to one’s account. Selling covered call and naked put options provides immediate income to one’s account. With a new gold rush in the marijuana space attracting Fortune 500 capital, there’s some real money to be made by exercising discipline and self-control.