It’s been a bad week for the TSX index, which has been shedding points consistently over a period of several days. And it looks like Canopy Growth Corp (TSX:WEED)(NYSE:CGC) has been one of the stocks hardest hit. Traders reportedly earned $450 million in a few days shorting Canopy and other pot stocks, while CEO Bruce Linton attempted to quell negative sentiment by dismissing the selloff as profit-taking by long-term holders.
There may be something to what Linton is saying. In a recent article, I opined that profit taking was one of the more probable explanations for last week’s selloff. This is especially likely, as there hasn’t been any bad news from cannabis companies recently. While last week’s supply shortages might have sounded bad, the truth is that they mean vendors are moving huge volume. Revenues will almost certainly be up at Canopy and other pot companies as a result of what played out last week.
Still, the cannabis bloodbath continues, with Canopy shares down to almost the level that Constellation Brands Inc (NYSE:STZ) paid for them back in August. With Canopy shares approaching their mid-August prices, profit taking can’t explain the continued selloff. So, what does?
Down with the index
One obvious explanation for the persistent weakness in Canopy shares–and pot shares as a whole–is simply the fall in the TSX index. On Wednesday, the TSX fell to its lowest level in two years, falling in tandem with the Dow and Nasdaq. The overwhelming majority of TSX stocks were affected, including reliable performers like the big five banks. In the selloff, only utilities and some energy stocks appeared to emerge relatively unscathed. In this light, it’s not surprising that pot stocks would be hit. However, the cannabis sector is down more than the TSX average, with Canopy in particular down 32% since the 15th.
Following the crowd
One possibility that can account for the persistent weakness in pot stocks is newer investors panic selling after long-term holders cashed out last week. The rally that preceded the current selloff was massive, with some stocks rising as much as 800% in mere weeks. Much of these gains happened long after the Constellation buyout triggered the rally and after Canopy shares had long surpassed what Constellation paid for them.
This seems to indicate that later in the rally, many were buying on hype. After long-term holders cashed out to take profits, the late comers may have panicked and sold out of fear. If true, this would plain why the pot selloff started before the TSX selloff and why pot prices slid more than the broader index.
If you were interested buying pot stocks before this week, I don’t consider this selloff a good reason not to buy. However, if you held Canopy shares before the August/September rally, now would be a good time to sell before buying them back at a lower price.
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Fool contributor Andrew Button has no position in any of the stocks mentioned.