Last week, cannabis stocks surged, with Cronos (NASDA:CRON) up 26%, Canopy (NYSE:CGC) up 21%, and Aurora (NYSE:ACB) back to the $2 range and up 29%. The sector found buyers as market sentiment turned euphoric.
Although this rally will not last, it gives investors plenty of trading opportunities.
Fundamentally, Cronos and Canopy have the best chance of survival. At $3 billion and $9 billion in market cap as at last week, respectively, these two have outside companies that injected cash on their balance sheet.
Both firms squandered that money while allowing them to invest in the future. As a bigger firm, the launch of edibles (cannabis 2.0) and more store openings in Ontario are near-term catalysts.
Bullish investors need to ignore the price/sales ratio of all cannabis stocks. $100 million in sales against an $8 billion market capitalization seems silly.
And demand-supply dynamics are unfavorable: Canada still has too much supply and falling prices. The illegal weed market continues to benefit from higher prices on the legal channels. If anything, the legalization market is driving demand in the illegal market higher.
Medical Cannabis
Aphria (NYSE:APHA) and Aurora are carving a niche in medical cannabis. This is an expensive venture because of higher marketing costs and slow sales of medical cannabis. Plus, R&D costs for justifying the medical use of the product will hurt cash flow.
Takeaway
Beware of the latest cannabis stock rally. Sell into the jump and buy into the dips.
