ACB - Marijuana Stocks Pop And Drop Post-Pardon News. MJ ETF Continues To Struggle.

Summary

• It was just two years ago when pot stocks began to climb high.
• Bullish political tailwinds boosted shares of several once popular, now infamous, companies.
• The MJ ETF fell nearly 90% to its recent low, but optimistic news out of the White House sent cannabis stocks soaring last week. Is the group a buy now?

The hot thematic play two years ago was marijuana. Ahead of the 2020 elections, traders bid up shares of pot stocks starting about seven weeks ahead of voters going to the polls. The legalization of marijuana was on many states’ voter cards, and several even passed measures to widen the scope of the drug being able to be used for medical and recreational purposes.

Indeed, the Democrats enjoyed some wins, and the bullish uptrend in the ETFMG Alternative Harvest ETF (MJ) continued. Then came the flip of the calendar. There was still uncertainty as to who would have Senate control in early 2021. A key Georgia race turned favorable for the Democrats, who largely support policies to make the use of pot easier. The so-called blue wave many had thought impossible cascaded across the nation. In terms of price action, A final buying burst propelled MJ to a high near $35 in February 2021.

Compounding a euphoric and meteoric rise in the stocks like Aurora Cannabis (ACB), Canopy Growth (CGC), and Tilray Brands (TLRY) was a coincidental peak of all things speculative and thematic early last year. Tops in emerging markets, biotech, and Cathie Wood-type equities also included many cannabis names. The bull market went up in smoke right then.

It has been a brutal bear market for those long anything pot related. MJ itself has fallen a whopping 87% from February 2020 to its low just a few days ago. Last week, however, there was hope for the bulls. It turns out President Biden is ‘high’ on the space.

A key initial step was made by the administration toward marijuana reform. All federal simple possession offenses were pardoned by the POTUS, keeping one of Biden’s campaign promises. Governors were asked to do the same at the state level.

A tailwind for the industry is that the majority of voters support cannabis legalization, according to a poll conducted by Morning Consult earlier this month.

Poll Question: Should Marijuana Be Made Legal in the U.S.?

But let’s home in on where MJ might go from here. Price action last week was intriguing given the massive rally seen on Thursday. On Friday, however, shares plunged as the realization that there is still a long way to go in the move toward making pot legal set in. The ETF dropped from above $6 to barely higher than $5 to close out the week.

Technically, I see a pair of important resistance levels. First, the $6.69 to $6.85 range appears significant – the May low and August rebound high. Above that, there’s a high volume of shared traded in the $9 to $12 range that will be tough on any sustained uptrend. Sellers might come about as low at $8.81 - the March 2020 low.

A risk/reward set up right now is being long with a stop under $4.58 given the significant move witnessed last week. This is a trade, not an investment, as the broader trend is undoubtedly lower.

MJ: Massive Downtrend, Resistance Levels to Watch

Fundamentally, data from Morningstar show a somewhat low valuation on one metric but look under the hood, and it’s not as favorable. The fund’s price-to-earnings ratio is a smidgen over 7, while its price-to-sales near 1.2 does not scream undervalued. Moreover, the free cash flow yield and dividend yield are not overly strong. At the factor level, as seen on the left in the below graphic, the niche features weak momentum.

MJ Stock Fundamentals & Valuation: Low P/E, So-So P/S, Weak Momentum

The Bottom Line

MJ looks decent for a swing long position with a tight stop, but long-term investors should shy away. The trend is steeply lower while its valuation, mainly its cash flow yield and dividend rates, suggests there is not a compelling valuation case. Could legislative actions and executive orders help the struggling industry? Perhaps, but that has been the same narrative since the fund topped early last year.

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