Here's the Right Marijuana Choice for Investors Now – Motley's Fool

Investment booms often lead to bankruptcy and, for recent investors in marijuana stocks, October was a rude awakening. Although investors were eagerly awaiting the legalization of cannabis for recreational purposes in Canada, a big dip in the broader market has led to a slowdown that has plunged key marijuana stocks.

However, when evaluating a portfolio of stocks, it is important not to let short term results have too much influence on your long term vision. One way to avoid letting your emotions get in the way of you is to realize that even after a significant setback, those who have been engaged in a particular investment always end up taking it in advance. This has been true for key players in the cannabis industry, and it is far more important to examine the fundamental performance of companies than stock price fluctuations to decide whether to retain a particular stock or move on to greener pastures.

An ugly October month for cannabis stocks

October was certainly not a good time for the marijuana industry. The enthusiasm for the imminent opening of the Canadian cannabis market has kept the momentum of major players Cover growth (NYSE: CGC) and Cronos Group (NASDAQ: CRON)and the recent IPO of Tilray (NASDAQ: TLRY) continued to attract attention because of the extreme volatility of the title. Many investors have been interested in the list of Aurora Cannabis (NYSE: ACB) on the NYSE as a potentially memorable opportunity to generate new gains for marijuana stocks.

But the combination of a broader market correction and a "sell the news" mentality after cannabis became legal in Canada resulted in dramatic declines. The four shares ended the month down from about a quarter to a third.

CGC data by YCharts.

The magnitude of the declines was a huge shock for investors in the sector, especially those who were new to the industry and who had bought stocks late in the upward part of the growing cycle of the market. marijuana. Just as quickly as the bulls had embraced the marijuana movement during the faster rise, skeptics flocked to declare the definitive end of the craze for cannabis.

A broader perspective

However, it may be more instructive to examine the performance of equities during a typical cycle of upward and downward movement of stocks. Three months is barely enough to be considered a true market cycle, but it gives a good idea of ​​how sudden market rises and falls often work in typical corrections.

CGC data by YCharts.

As you can see, the huge gains in marijuana stocks in August and September, which preceded the historic opening of the Canadian cannabis market, were more than enough to offset the declines that occurred in October. In total, the Tilray stock more than quadrupled in the three-month period, even with its recent decline, and substantial gains of 20% to 40% for Canopy Growth, Aurora Cannabis and Cronos Group showed that even a large drop had not been observed. enough to dissuade investors from recognizing the enormous potential for long-term growth of marijuana.

The right way to look at marijuana stocks

There will inevitably be many more ups and downs for marijuana stocks in the months and years to come. As important as Canada's decision to legalize the recreational pot, it is only a drop of water compared to the global potential of the industry. As more and more US states move toward legalization and the federal government is considering whether or not to lift its own restrictions on marijuana, investors will have to deal with high volatility as sentiment grows and decreases. Along the way, some marijuana companies will assume leadership roles in the industry, while others will make mistakes that will make them lose the rating and leave room for new players in the field. .

The setbacks suffered by Canopy, Aurora, Cronos and Tilray in October have been painful for shareholders, but they will not define the future of the cannabis industry. Well-informed marijuana investors need to stay focused on fundamentals such as sales and earnings to evaluate stocks that will gradually disappear over time – and that will yield the best long-term returns for the cannabis industry.

Dan Caplinger has no position in the mentioned actions. The Motley Fool has no position in the mentioned actions. Motley Fool has a disclosure policy.