Traders Toking Profits as a Red-Hot Space Gets Smoked

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Buy the rumor, sell the news. The old adage is playing out today as weed goes legal in Canada.

Cannabis stocks have been pretty much the hottest group in the entire market of late, with companies like Tilray (TLRY), New Age Beverages (NBEV) and India Globalization Capital (IGC) up several hundred percent in the last three months.

Others, like Canopy Growth (CGC) and Cronos (CRON), have drifted recently after more than doubling earlier in the year. But today they have one thing in common: They’re getting smoked as traders toke profits on those big rallies.

In other words, traders bought the rumor and now they seem to be selling the news.

Cronos (CRON) chart with 50-day moving average.

Canada’s new policy permits the sale of marijuana at the national level, while giving each province control over sales and age limits. It’s a big deal because it essentially puts legal pot within close access of the massive U.S. market.

But does that make it a great business? After all, we’re talking about an easy-to-grow commodity with few barriers to entry. Investors usually want companies to have clear value propositions and defensible market share. That means either an iconic brand (think Apple, Nike, Starbucks) or clear intellectual property (like software or a drug with known users).

Wall Street will now start addressing these issues more seriously now that the hype has passed. They may quickly focus on pot stocks’ high valuations, given that most of them trade at higher multiples than biotechnology firms.

In conclusion, cannabis stocks have ripped higher as traders looked for exposure to the trend of legalization up north. But now that the event has passed, they may be cashing in.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.