Market Pulse: Manias come and go
I’ve seen several manias. Technology stocks were a must-hold in 1999 only to fall 70% when the internet bubble burst. Cisco Systems was the darling of Wall Street and was the most valuable company on earth in March 2000. Twenty years later the stock is half that value.
At the height of the bubble Jim Cramer on CNBC famously said JDS Uniphase’s ticker symbol (JDSU) stood for “Just Don’t Sell Us.” The stock was very hot and split 2:1 many times. Then it wasn’t. Its price eventually fell from $153 to $2.
Next up was the real estate mania before the Great Recession. Then there was bitcoin. Interest in it was high on its run to $19,000. Now it’s $11,000. Then there were pot stocks.
Marijuana stocks were all the rage in early 2019. I was asked about them wherever I went. Surely with marijuana becoming legal they would rise, right? And they’ll rise more once pot is legal in Canada, too, right? Not so fast.
Last week one of the largest pot stocks, Aurora Cannabis, fell 23% after disappointing fiscal 2020 fourth quarter results. Aurora projected Q1 revenue would decline by 5 to 11%. This stock is down 96% from its high.
What went wrong with pot stocks? Certainly, investors expected way too much. But there are fundamental problems as well. In the U.S., medical marijuana is legal in 33 states while recreational pot is legal in only 11 states. Because of this, lending institutions are wary about doing business with cannabis companies. Pot companies have depleted cash reserves.
The first exchange-traded fund (ETF) to focus on marijuana stocks was Alternative Harvest (MJ). Its five largest holdings are Canopy Growth Co, Cronos Group Inc, GW Pharmaceutical, Tilray, and Aurora Cannabis. It has lost a third of its value since its December 2015 inception. Yuck.
The bullish case is that more states will legalize pot. Maybe. And states that have medical marijuana now will move to recreational use, too. Maybe. But it won’t matter to retail investors because they have already taken their lumps and moved on.
What are today’s manias? Look to what was a 42% year-to-date gain in the Nasdaq. No, investing isn’t as easy as simply buying the largest technology stocks, Nikola or Tesla included. Things can happen. The surge in home prices as people move from San Francisco to Truckee and Tahoe seems to be a mania, too. Maybe.
David Vomund is an Incline Village-based Independent Investment Adviser. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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