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With Cannabis Stocks Down Nearly 10% Thursday, Will a Rush to the Exits Ensue?

One of the more interesting discussions I heard recently from an analyst covering the marijuana sector is the idea that early investors who’d bought equity positions in cannabis producers one or two years ago have largely done so based on some sort of belief that a herd mentality will take over and everyone will want to get into this crowded trade. Well, to put it mildly, the herd has charged forward in a big way.

A mentality centering around some sort of fear of missing out on the recent gains an investor’s taxi cab driver or secretary has had in the cannabis space (similar to the cryptocurrency space, in my opinion) has led to investors continuing to pile in to this crowded trade at valuations that have begun to make less and less sense, leading to a scenario in which nothing other than utter euphoria could be relied on as a key driver of valuation growth of a relatively minuscule industry filled with highly speculative and questionable forecasts of future sector growth.

On Tuesday, shares of the cannabis industry-tracking exchange-traded fund (ETF) Horizons Medical Marijuana Life Sciences ETF  (TSX:HMMJ) was down 9.5%, with many of the country’s largest producers experiencing double-digit declines on what I would deem an absence of news.

Without a real, meaningful catalyst I could put my finger on, I began thinking about reasons for how such a decline could be possible. I then considered the downside of what this analyst was saying initially — as much as the herd charges forward, when the herd retreats, it will likely do so very quickly and in a big way.

My concern now is for many of those long-term cannabis investors who’ve pledged never to sell a single share in a marijuana firm. Let’s put it this way: a long-term investment in Microsoft Corporation  (NASDAQ:MSFT) in the 80s or 90s or 2000s was a good play. The stock is at all-time highs. That being said, investors who’d bought Microsoft in 2000 have finally seen the company’s stock price return to 2000 levels as of last year. The bubble essentially took 17 years to re-correct, and if I’m right about this cannabis bubble, the same situation could be at hand for investors who’ve bought Canopy Growth Corp.  (TSX:WEED) stock at $44.

The herd mentality that has taken over could result in what could only be categorized as a race to the exits. Before a trading surge results in various trading platforms shutting down from the vast number of Canadian retail investors who are trying to exit these trades, I suggest investors consider trimming positions and taking profits while it is still possible to do so.

Stay Foolish, my friends.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft.

Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

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