As I’ve long said, some investors will make millions in marijuana, but many more will lose a lot of money.
When I wrote “How to potentially become a marijuana millionaire, albeit carefully,” the most important word in the headline was “carefully.” When I first started writing that investors with less experience think that all they have to do is buy a few marijuana stocks and they will become rich, there was a lot of criticism. Many could not fathom as to why I was saying that. Since then, I have published many more examples, and investors who were previously criticizing are now beginning to understand.
Read: The collapse of this cannabis stock offers a valuable lesson to every investor
It takes skill, knowledge and the proper mindset to make money in marijuana stocks. Let us explore with another example that, on the surface, appears unbelievable because this is a story of perhaps the biggest marijuana-related achievement. Let’s explore with the help of a chart.
Please click here for an annotated chart of GW Pharmaceuticals GWPH, +0.62% Please note the following:
• GW Pharmaceuticals scored a first by getting FDA approval for a cannabis-based medicine.
• This medicine, epilepsy drug Epidiolex, has the potential to generate over $1 billion in sales by 2022. The drug is derived from cannabidiol (CBD). CBD has many medicinal properties that help a variety of conditions. The drug contains less than 0.1% tetrahydrocannabinol (THC). THC is what makes people high. The drug targets Lennox-Gastaut syndrome and Dravet syndrome. Over a period of time, GW Pharmaceuticals may get approval for additional conditions.
• The company also has a pipeline of other promising cannabis-based drugs.
• The chart shows the excitement among investors when another major achievement for marijuana happened. The Drug Enforcement Agency (DEA) classified Epidiolex as a Schedule V controlled substance. Schedule V is the lowest-ranked class. It was widely anticipated that the DEA would classify it as a Schedule I drug, the highest-ranked class. In plain English, the DEA moved this cannabis-derived drug to the lowest-risk category.
• Investors had a good reason to celebrate by buying.
• Analysts were uniformly bullish.
• Momo (momentum) crowd money flows were positive.
• Of special interest is that smart money flows were negative, as the momo crowd was aggressively buying on the news and investors were celebrating. As the chart shows, at that time, many questioned the smart money flows as the stock was making new highs and the news was great. Now we know that smart money flows were spot-on in being negative. With hindsight, that was the top, but we called it right in real time.
• Segmented money flows have an excellent record in giving investors an edge in all kinds of stocks, not only marijuana stocks. I do credit segmented money flows, in large part, to The Arora Report’s success in calling moves in various marijuana stocks such as Canopy Growth CGC, +2.32% Tilray TLRY, -4.44% Aurora Cannabis ACB, +0.27% and Cronos CRON, +2.58% To learn about segmented money flows, please see “How ‘peak good news’ for marijuana stocks may undermine investors.”
• Segmented money flows also helped us catch big moves: First, from the long side in less popular marijuana stocks such as New Age Beverages NBEV, +4.75% and India Globalization Capital IGCC, +19.12% and then from the short side. Please see “Marijuana beverages are the new thing, but investors should only take sips” and “Marijuana investors got burned by Pepsi — how to avoid this mistake in the future.”
• The chart shows that subsequent to the good news, GW Pharmaceuticals has lost 35% of its value.
• Goldman Sachs, Morgan Stanley and J.P. Morgan helped GW Pharmaceuticals with a 1.9 million-share secondary priced at $158. Those who bought in the secondary now have significant losses.
• Throughout the decline, most analysts stayed positive and called for buying the stock.
• The Arora Report call during the decline has been “do not buy.”
• One advantage of marijuana stocks is that they are not highly correlated to the Dow Jones Industrial Average DJIA, +0.78% or other benchmark indices.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
At The Arora Report, we do think that GW Pharmaceuticals may become a buyout target, especially if results of their other clinical trials are positive. Ultimately a buyout could potentially take place north of $200. In spite of this call for a potential buyout, The Arora Report is still waiting for its ZYX Change Method to give a buy signal.
Investors will find that discipline to not buy in spite of a call for a potential buyout as a good example of the proper mindset. This is reasonable in view of the fact that 142 of The Arora Report portfolio companies have been bought out over the years. Focusing on potential buyouts is an evergreen way to make money.
Do you need more proof? Please take notice of the 35% loss in value in a marijuana company that achieved the following:
• The first FDA approval of a cannabis-related drug.
• The first Schedule V for a cannabis-related drug from the DEA.
• Substantial intellectual property.
• Prospects for strong revenues.
• Prospects for getting Epidiolex approved for additional indications.
• Prospects for other drugs.
• Prospects of a buyout at a significantly higher price.
Most marijuana companies do not have such advantages. Do you need more proof about the validity of what I have been writing? Yes, the potential for marijuana is great, but investors need significant knowledge, skills, resources of good analysis and training in a proper mindset to make money in marijuana.
Please also read:
To invest successfully in marijuana stocks, avoid this one thing
How to survive marijuana stocks’ rollercoaster ride
If you buy only one marijuana stock, this should be it
Seven reasons Big Tobacco is likely to make a move on the marijuana industry
Tilray is the poster boy of short-squeeze stock candidates — here’s how to find others
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.