Stocks Plummet in Wild Ride

Stocks finished lower today in volatile trading. The Dow Jones Industrial Average was down nearly 320 points at its session low, before rebounding into the green and then closing deeply in the red.

Before I get to today’s roller-coaster market action, a few words about something else that can make people feel dizzy, namely marijuana.

When I was 12 years old, my dad took me to the local movie theater to see Woodstock, a 1970 film that blew my little adolescent mind. By the time the lights came up, I had outgrown Disney and developed a crush on Grace Slick.

Marijuana, of course, played a prominent role in this Academy Award-winning documentary about the legendary music festival that ran for three days, starting on August 15, 1969, in upstate New York.

During the Woodstock era, “pot” was the forbidden fruit that hippies, freaks, college kids, and rebels of all stripes imbibed to taunt the establishment.

Fast forward from August 15,1969 to October 17, 2018.

Effective today, Canada legalized on the federal level the possession and use of recreational cannabis. Canada is the first G7 nation to take this bold step.

Mary Jane has moved from Woodstock to Wall Street, representing a disruptive force for pharmaceutical, tobacco and beverage companies. Below, I’ll discuss the significance of today’s development in Canada.

First, let’s look at Wall Street’s crazy day. The major stock indices slumped Wednesday in choppy trading, amid negative data on housing and renewed fears over rising interest rates.

The Commerce Department reported Wednesday that housing starts fell 5.3% to a seasonally adjusted annual rate of 1.201 million units in September, versus the 4.8% estimate.

Rising interest rates are dampening the crucial housing sector, a reminder to investors that Federal Reserve tightening could choke off the recovery and kill the bull market. Housing bellwether Home Depot (NYSE: HD) today fell 4.37%.

A summary of the September 25-26 Federal Open Market Committee session was released today. The upshot: the Fed fully intends to stick with its plans for rate hikes, despite criticism from President Trump.

Netflix (NSDQ: NFLX) reported blockbuster earnings Tuesday after the closing bell, but the news failed to spark a broad market rally.

The streaming video giant posted earnings per share (EPS) of 89 cents versus the estimate of 68 cents. Netflix surpassed its own guidance targets. Subscriber additions hit 6.9 million and the company is projecting 9.4 million net subscriber additions in the fourth quarter. NFLX shares today rose 5.28%.

The third-quarter earnings season has been strong. The blended year-over-year earnings growth rate for the S&P 500 is projected to reach 19.1%, according to research firm FactSet.

But clouds are gathering. FactSet reports that in earnings calls this season, corporate managers are increasingly using the term “tariff” and citing the trade war as a headwind for their respective companies.

One industry immune to the trade war, at least for now? Marijuana.

Manna for marijuana…

Canada today became the second country, after Uruguay, to legalize possession and use of recreational cannabis for all adults. Medical marijuana has been legal in Canada since 2001.

Canada’s approach differs from that of the U.S., where marijuana remains banned at the federal level but states are free to enact their own laws.

In the U.S., 30 states and the District of Columbia have legalized marijuana to some degree (see chart, current as of March 2018):

Source: Governing magazine

Canada has left it to the provinces and municipalities to determine parameters, such as where cannabis can be bought and consumed.

Analysts expect demand for marijuana to surge in Canada, creating an acute shortage. Scarcity of weed should be manna for marijuana investors.

According to Ameri Research, the global legal marijuana market generated spending of $14.3 billion in 2016 and is forecast to grow at a compound annual growth rate of 21.1% between 2017 and 2024, culminating in 2024 revenue of $63.5 billion:

Source: Ameri Research

Arcview Market Research estimates that the recreational marijuana market will account for nearly 70% of that global spending by 2024, with medicinal treatments taking up the rest.

So it all begs the question: why did leading marijuana stocks fall today?

GW Pharmaceuticals (NSDQ: GWPH) fell 0.16%, Canopy Growth (NSDQ: CGC) fell 4.68%, Cronos Group (NSDQ: CRON) fell 7.55%, and Tilray (NSDQ: TLRY) fell 6.40%. Diversified marijuana/tobacco stock 22nd Century Group (NYSE: XXII) rose 0.66%. The benchmark Horizons Marijuana Life Sciences ETF (HMMJ) fell 2.14%.

Marijuana stocks have enjoyed a huge run-up this year; today’s swoon was a classic case of “buy on the rumor, sell on the news.” Over the long haul, the purveyors of recreational and medicinal marijuana offer the potential for outsized gains.

And what about Ms. Slick of Jefferson Airplane fame? The erstwhile rock diva is now age 78 and retired in Malibu, where she lives comfortably on the income from her investment portfolio. Here’s to peace, love and profits.

Wednesday Market Wrap

  • DJIA: 25,706.68 -91.74 (0.36%)
  • S&P 500: 2,809.21 -0.71 (0.03%)
  • Nasdaq: 7,642.70 -2.79 (0.04%)

Wednesday’s Big Gainers

  • SI-BONE (NSDQ: SIBN) +33.27%

Medical device maker launches successful IPO.

  • vTv Therapeutics (NSDQ: VTVT) +28.42%

Biotech’s Alzheimer’s drug shows promise.

  • Anaplan (NYSE: PLAN) +11.27%

Enterprise cloud provider’s IPO defies tech downturn.

Wednesday’s Big Decliners

  • Smart Sand (NSDQ: SND) -19.76%

Major analyst slashes outlook for frac sand stocks.

  • NantKwest (NSDQ: NK) -17.34%

Wall Street skeptical of immunotherapy firm’s prospects.

  • Adtran (NSDQ: ADTN) -17.16%

Networking equipment maker’s earnings fail to impress.

Letters to the Editor

“Marijuana is a vice. I won’t invest in it.” — James H.

From time to time, I’ve highlighted the opportunities in “sin” sectors, including armaments, tobacco and alcohol. Successful investors take the world as they find it, but I respect your view. Allow your conscience to be your guide.

Questions about marijuana investing? Drop me a line:

John Persinos is the managing editor of Investing Daily.