Just a few weeks ago, back when the cannabis trade looked dead, I encouraged investors to back up the truck on both Canopy Growth (TSX:WEED)(NYSE:CGC) and Aurora Cannabis (TSX:ACB) stock, noting that the shares of both companies were well worth the risk in spite of all the excessive negativity by those on the street.
I reminded investors that the boom and bust cycle was nothing new and that investors still had the opportunity to profit off of the Canadian “green rush” if they found it within themselves to take on a contrarian position at a time when you’d look like a complete fool (lower-case ‘f’) for doing so.
“I’ve been observing the marijuana market since 2016, and every single year the bubble has popped, only to rocket higher, quadrupling over a short period of time.” I said.
Fast-forward just over a week later, and in retrospect, that foolish move you’ve made turned out to be a capital-f Foolish move, as the Aurora and Canopy stock has soared 61%, and 83%, respectively, since my August 14 contrarian buy recommendation. Not bad for a 10-day return!
If you acted on my timely advice, you’re probably feeling like a genius right about now, but it’s important not to get greedy now that others have also become greedy.
I admit, there was a high degree of luck involved with my timing. We’re not day traders here at the Fool, after all. We’re all about investing Foolishly with a long-term mindset. And as I’ve emphasized in previous pieces, Warren Buffett’s contrarian strategy of “being greedy while others were fearful” was still applicable in the world of marijuana, even though you’d think the cannabis industry would be at the mercy of the greater fool theory (an actual theory that has nothing to do with The Motley Fool).
I didn’t suspect that Constellation Brands (NYSE:STZ) would announce their upped Canopy stake in the following trading session — nobody could have guessed that. I did mention many times in previous pieces that Constellation would likely be back for another piece of Canopy over the next year, however, and that such an announcement would cause shares to pop.
As it turned out, Constellation pulled the trigger, while Canopy shares hovered around its $33 technical level of support. Buying such steep dips in the cannabis space has been a profoundly profitable strategy in the cannabis space up to now, but now that the trough is all but gone with shares of Canopy flying past all-time highs, does it still place a bet?
I mentioned the possibility of $100 Canopy by year-end, but after such a sharp upward (83% in just a few trading sessions), it makes a ton of sense to take a bit of profit off the table. Given the vomit-inducing amounts of volatility, I’d say such a broader industry pullback is more than likely as the rally exhausts itself.
More recently, U.K. alcohol firm Diageo plc is reportedly looking to “keep up with the Joneses” with a partial (or full) cannabis stake of its own. As Canopy seems to be the property of Constellation, I’m inclined to believe that Aurora or Aphria stock may have more upside versus Canopy, which already has an alcohol investment already baked (weed pun intended!) into its stock.
Stay hungry. Stay Foolish.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette has no position in any of the stocks mentioned.