Late last month, optimism was building among average investors about Aurora Cannabis’ earnings.
Even though they continued to buy Aurora Cannabis ACB, +1.95% stock in the days leading up to the company’s earnings report after the stock market closed Monday, many were surprised to see the stock fall. Bulls were expecting the stock to hit $10. But Aurora Cannabis peaked Feb. 4 at a little over $8. ACB, +1.95%
Many investors are still oblivious of the froth in marijuana stocks. They continue to believe that all they have to do is buy a few stocks like Aurora Cannabis and they will become rich.
For those serious about making money in marijuana, there is a better way. It’s a tool called segmented money flows.
Since I wrote “How to potentially become a marijuana millionaire, albeit carefully” (with the most important word in the headline being “carefully”), a lot of money has been made in marijuana stocks by following money flows and ignoring earnings. That’s what we do at the Arora Report.
Read: Aurora Cannabis earnings show big growth in pot sales, but worrisome profit trend
Let’s examine current money flows with the help of a chart to help marijuana investors.
Chart
Please click here for a chart showing segmented money flows in 15 popular marijuana stocks. Please note the following:
• The market capitalization of several marijuana companies are into the billions of dollars. It is nonsensical to trade these companies based on the differences of a few million dollars in earnings or revenues, which are currently at low levels.
• The real reason behind the latest move has been short squeezes, not a change in fundamentals. I will explain short squeezes later on.
• As the chart shows, smart money flows (those of professional investors) in Aurora Cannabis are negative. Going into the earnings, smart money flows in Aurora Cannabis were mildly negative.
• Aurora Cannabis stock first fell after the earnings report, but then rebounded on another mini-short squeeze. Short sellers often buy when a stock dips to lock in profits. Their buying drives the stock up. This forces other short sellers to start buying the stock to “cover their shorts,” leading to a short squeeze.
• Marijuana stocks trade on sentiment.
• As the chart shows, momo crowd (average investors) money flows are extremely positive in Aurora Cannabis, Canopy Growth CGC, +3.48% Cronos CRON, +2.83% and Tilray TLRY, +1.43% Please see “If you buy only one marijuana stock, this should be it.”
• In contrast, smart money flows are mildly negative in Aphria, Canopy Growth and Crones.
• As the chart shows, momo crowd money flows are positive in Aphria APHA, +8.65% Liberty Health LHSIF, +4.23% MedMen MMNFF, +2.31% Green Organic Dutchman Holdings TGODF, +4.58% and New Age Beverages NBEV, +2.41% Please see “What to do now if you own, or want to buy, marijuana stocks.”
• Momo crowd money flows are positive in GW Pharmaceuticals GWPH, +2.20% Scotts Miracle-Gro SMG, +1.10% and Constellation Brands STZ, -0.50% Smart money flows in these stocks are negative.
• Both smart money flows and momo crowd flows are positive in Corbus Pharmaceuticals Holdings CRBP, +9.65%
• Momo crowd flows are negative in Craft Brew Alliance BREW, +1.41%
• Momo crowd money flows are positive in marijuana ETF MJ, +2.71% but smart money flows are negative.
• Marijuana stocks are uncorrelated with the Dow Jones Industrial Average DJIA, +1.50% S&P 500 ETF SPY, +1.36% and Nasdaq 100 ETF QQQ, +1.54%
• Investors ought to look for fundamental changes in addition to sentiment to be successful.
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.
Short squeezes
The real reason behind the recent rise in marijuana stocks is short squeezes. The reason behind the pullback is that this leg of short squeezes is ending. As of this writing, there are initial signs of another short leg starting. This will lead to a lot of artificial buying that is not based on fundamentals.
In the chart, under the short squeeze column, is shown the positioning for further short squeezes. For example, Cronos short squeeze money flows are extremely positive. This means that on slight good news, Cronos can experience a significant spike up because of a short squeeze.
Rankings
The chart also shows the relative rankings of the 15 popular marijuana stocks.
Risk-adjusted rankings are more useful for medium- and long-term positions. Non-risk-adjusted rankings are more useful for short-term or trade-around positions.
What to do now
These recommendations were made when marijuana stocks were much higher.
Those not in marijuana stocks may consider waiting patiently for signals to buy select marijuana stocks. There is too much risk in buying these stocks today. Investors who have learned to respect risk will do significantly better in the long run compared to those who just get excited about the momentum and forget the risk.
This leg of short squeezes is ending. There is a distinct possibility of another short squeeze leg coming up.
Those who are simply doing short-term trades (not long-term investments) may consider taking profits on any up move and consider jumping back in if another short squeeze leg starts.
Those who are aggressive and holding marijuana stocks may consider continuing to hold core positions but take partial profits on the rest on any up move.
Those who are holding positions larger than core positions or trade-around positions may consider taking partial profits on any up move.
Those who are growth-oriented and holding marijuana stocks may consider slightly trimming core positions at the edges by taking partial profits on any up move.
Arora’s 14th Law is directly applicable in this situation: To be successful at investing and trading, become a master of position sizing. Position sizing is critical to investing in marijuana stocks. In addition, using techniques such as trade-around positions is especially important.
Please also read:
To invest successfully in marijuana stocks, avoid this one thing
How to survive marijuana stocks’ rollercoaster ride
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
Marijuana beverages are the new thing, but investors should only take sips
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.