By Nigam Arora
Money flows are mostly negative or neutral in marijuana stocks, and the Food and Drug Administration's warning is creating an overhang
The U.S. Food and Drug Administration has thrown a big impediment in the way of marijuana investors.
Before discussing the FDA's move, let's build some background with the help of a chart.
Please click here () for a chart showing segmented money flows in 16 popular marijuana stocks.
Note the following:
-- Smart money flows are neutral in Aphria (APHA.T), Canopy Growth (WEED.T), Cronos (CRON.T) and New Age Beverages (NBEV).
-- Smart money flows are mildly negative in Aurora Cannabis (ACB.T).
-- Smart money flows are negative in marijuana ETF (MJ).
-- Smart money flows are negative in Curaleaf , Liberty Health , MedMen (MMNFF) and Tilray (TLRY).
-- Smart money flows are mildly positive in Green Thumb Industries .
-- Among marijuana-related stocks, smart money flows are mildly positive in Corbus Pharmaceuticals (CRBP) and KushCo Holdings (KSHB).
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It is important for investors to go directly to the source and read the FDA news release () carefully. The FDA warned 15 companies for illegally selling various products containing cannabidiol on safety concerns. Here are the important points:
-- Before forming an opinion of the FDA, keep in mind that the FDA's intention is to protect the public from harm. The FDA is well-intentioned. The key is to expedite the research.
-- The FDA's stance is comprehensive.
-- It will be difficult and expensive for the companies to fight the FDA.
-- Many hope there will be political pressure on the FDA to moderate its stance.
-- It is conceivable that, due to political pressure, the FDA does not follow through with strict implementation. However, if it does, many companies will be in big trouble.
-- There is hope that a lot of good research is being done primarily outside the United States. It is too early to know if the research will support most of the claims regarding CBD.
-- Considering that marijuana has been used for centuries and there is a significant body of anecdotal evidence in favor of CBD, there is a high probability that new, well-done studies may support most of the common claims.
-- These days, sometimes CBD is being sold as a cure-all for many health issues. Such claims are not likely to be true as research progresses.
A short squeeze occurs when short sellers either panic or are compelled to buy to cover shares that were previously short sold. This leads to a lot of artificial buying that is not based on fundamentals.
Often the trigger for a short squeeze is good news. Marijuana stocks are especially prone to short squeezes.
The chart shows the relative rankings of the five select popular marijuana stocks. The rankings are based on the six screens of the ZYX Change Method.
Risk-adjusted rankings are more useful for medium- and long-term positions. Non-risk-adjusted rankings are more useful for short-term and trade-around positions.
What to do now
Consider keeping a close eye on two stocks not included in the chart above. Those stocks are CV Sciences (CVSI) and Charlotte's Web, which trades on the Toronto Stock Exchange as CWEB or over the counter as .
At The Arora Report, we will carefully monitor the new segmented money flow data over the coming weeks to determine the next steps. In the very short term, marijuana stocks have rebounded from a very oversold condition. However, the bounce has been weak. More year-end tax-loss selling may be ahead unless short squeezes start. Short squeezes can drive these stocks much higher.
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 (mailto:Nigam@TheAroraReport.com).
-Nigam Arora; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
November 26, 2019 11:09 ET (16:09 GMT)
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