Pot Stocks Rebound to Start Off 2019

By Anthony Summers
Senior Research Analyst

Cannabis Markets

The rebound in cannabis stocks has begun…

But are investors ready to jump back in?

The flood of capital pouring back into cannabis stocks – as well as the strong rally we’re now seeing in the sector – suggests the answer is yes.

Of course, I’m not surprised…

Just two days before the sector bottomed in 2018, I argued that cannabis stocks would see a big resurgence in 2019 once the dust of the market’s correction had settled.

So far, we’re already beginning to see the first fruits of that.

One benchmark to watch is the Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF), which has been soaring in recent weeks.

The exchange-traded fund (ETF) – which tracks North American cannabis stocks – has surged as much as 40% since bottoming in December.

That bottom was set just as one of my favorite technical indicators – the relative strength index (RSI), which I discussed last week in relation to bitcoin – signaled a buy for the industry.

This is a straightforward momentum gauge that’s effective when applied correctly.

The indicator ranges from 0 to 100. When it’s above 70, the asset is considered overbought, which could signal it’s time to sell. When RSI is below 30, the asset is considered oversold and is possibly a buy.

Now we’re seeing cannabis stocks rally off that bullish signal where RSI touched the 30 level on Christmas Eve.

 

Since then, the ETF has seen an influx of capital to the tune of about $19 million, while the SPDR S&P 500 ETF (NYSE: SPY) lost $715 million in net flows over the same period.

This is a good sign that investors are once again excited about this sector in particular.

But I believe the biggest gains are yet to come…

We’re also about to enter a wild year for the cannabis industry in the wake of Canada’s nationwide legalization and the passing of the 2018 U.S. Farm Bill.

Going forward, we should expect to see a surge in industry revenues, which will be a major boon to shareholder returns coming off this recent stock market correction.

Consider these positive revenue estimates…

Canopy Growth Corp. (NYSE: CGC) is forecast to report a 294% spike in revenue to $67.3 million for the last quarter and an additional 398% year-over-year revenue increase in the current quarter, according to Bloomberg Finance L.P.

Aurora Cannabis (NYSE: ACB) is also poised to see as much as a 424% jump in revenue for its most recent quarter and 426% in its current quarter.

Another big-name cannabis stock, Aphria (NYSE: APHA), could see as much as a 371% rise in its revenue when it reports its latest quarterly earnings. But analyst estimates suggest a massive 735% boost in sales for the current quarter.

And Cronos Group (Nasdaq: CRON) is forecast to report a year-over-year revenue pop of 424% for its most recent quarter.

We’re seeing similar forecasts across the board… even for smaller companies.

Also, keep in mind, this is on top of the revenue spikes we’ve already seen for the sector in the past year – prior to the legal victories achieved in more recent months.

It’s no wonder investors are regaining optimism for the sector’s biggest stocks… fueling big double-digit gains in just a matter of weeks.

As I said before, “I believe cannabis stocks are exactly where long-term investors should want them to be: nice and cheap.”

Relatively speaking, they still are.

With fundamentals, technicals and rejuvenated investor sentiment now lining up, this is sizing up to be a nearly perfect buying moment for cannabis stocks.

The industry’s best year has only just begun. A tidal wave of revenue will start flooding into cannabis stocks in the quarters ahead.

But to be best positioned to capture gains, you’ll want to get back into these stocks sooner rather than later.

Good investing,

Anthony