Making the Grade

How to Apply Value Investing to Pot Stocks

Value investing is like Baskin-Robbins – there are a lot of flavors to choose from.

You have deep value, modern value, synthetic value… You have traditional value, where price-to-book is king, as well as a host of other metrics.

But relative value is my preferred flavor.

I’m a pre-momentum investor. And most of the trading strategies I employ are offshoots of this approach.

Personally, I believe traditional value is dead. That’s an approach for a market that no longer exists.

I see relative value as being more important in today’s world. It compares a stock’s price directly with the average value of its industry. And you can quickly tell whether it is overvalued or undervalued.

Of course, today’s a great time to talk about value because the broader indexes are in a free fall.

The U.S.-China trade war tantrum is back in focus. And companies caught in the crossfire are getting slaughtered as the markets suffer their worst weeks of 2019.

But even though pot stocks have nothing to do with American-Sino relations, they haven’t been safe from the pain.

The North American Marijuana Index peaked back on March 26 at 311.17…

marijuana index

Since then, U.S. and Canadian cannabis shares have lost 13.45% of their value.

During the sell-off in March, when pot stocks hit near-term lows, my team and I looked at the relative strength index (RSI) for the sector.

This momentum indicator measures the magnitude of recent price changes.

Even though that may sound complicated, using RSI is pretty straightforward.

An RSI reading above 70 is considered overbought (or overvalued).

A reading below 30 is oversold (or undervalued).

But we also want to look at a company’s RSI compared with its industry’s rating. We want to know its relative value.

Right now, the cannabis sector’s average RSI is 45.3.

That’s more significant than it might seem.

When we looked at the industry’s RSI on February 11, the average was 55.93. In March, it was slightly lower at 51.5.

So this is the lowest RSI we’ve seen for the cannabis industry in 2019.

Back Up the Truck… or Back Out?

Now, even though valuations have tempered a bit in the past couple of months, there are still plenty of companies investors need to be wary of.

Here are the top 10 overbought pot stocks…

top overbought pot stocks

 

We see Indus Holdings (CSE: INDS), Frelii (OTC: FRLI) and Zynerba Pharmaceuticals (Nasdaq: ZYNE) are not only above the industry average of 45.3 – they’re also above that significant 70 level.

The remaining companies are all above 60.

Now, you may be asking, “How valuable is this data? Does RSI really work?”

Well, the 10 most overbought cannabis stocks we identified based on RSI back on March 11 have struggled since then.

In fact, their average return over the past two months is a loss of 7.08%!

And four of the pot stocks we warned investors about – 48North Cannabis Corp. (OTC: NCNNF), C21 Investments (OTC: CXXIF), Cannex Capital Holdings (OTC: CNXXF) and Terranueva Corp. (CSE: TEQ) – each fell more than 20%!

That’s more than double the 8.87% loss the Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF) has lost in that span. And it’s more than the 8.96% the North American Marijuana Index has lost since March 11.

Now let’s turn our attention to opportunity.

Here are the top 10 oversold stocks…

top oversold pot stocks

 

Right off the bat, we have six companies that are cheap on a relative basis, below the industry average RSI of 45.3, and below that all-important traditional “oversold” 30 level.

And we have some primo names in this group, like Aphria (NYSE: APHA) and KushCo Holdings (OTC: KSHB). (One of our High Five this week, CannTrust Holdings (NYSE: CTST), just missed the cut – it’s No. 11.)

The 10 most oversold cannabis stocks we identified based on RSI back on March 11 have done pretty well.

Their average return since then is 28.61%!

Not only does that outpace the broader cannabis sector during that stretch, but the gains were led by two big winners.

Curaleaf Holdings (OTC: CURLF) shot up 76.87%!

And Body and Mind (CSE: BAMM) skyrocketed 314.29%!

Neither are bad returns over a little more than two months.

Though it’s important to note that both are now flashing “overbought” – as highlighted in the first chart.

The Case for RSI

Every technical trader and value investor will share with you the indicators and ratios they like to use.

I’m a relative value investor. And I believe the only comparison that matters is a company’s value relative to that of its industry and its peers.

RSI is a quick and easy momentum indicator that all investors should have in their toolbox.

And we’ve already seen it produce big gains in the past two months.

Here’s to high returns,

Matthew