It’s déjà-vu. Here we are in early September, and the cannabis industry is on the cusp of another significant macro event. The legalization of cannabis edibles is expected to come no later than October 17, 2019.
If the date sounds familiar, it should. It is exactly a year to the day Canada legalized the sale of recreational marijuana. Estimates vary widely, but the recreational cannabis market is expected to reach around $8-10 billion in size by 2022.
Although, it hasn’t come with as much fanfare, the legalization of edibles is another another significant milestone for the industry. The edibles market is expected to be worth approximately $4.1 billion by 2022. This is about half of the expected market for recreational cannabis.
In simple terms, the edibles market has the potential to increase pot stocks market size by 50% over the next few years.
A familiar pattern has emerged
In the summer of 2018, the industry crashed and pot stocks were trading at yearly lows. At the time, pot stocks fell by more than 50% from their highs achieved earlier in the year. The industry was cast aside and the majority of industry players were in oversold territory.
Then September rolled around, and the markets drove the price of pot stocks upwards in advance of legalization. However, once legalization occurred, pot stocks once again suffered big drops. It was a classic case of “buy the rumour; sell the news.”
A similar pattern is emerging this year.
On August 26, the Canadian Marijuana Index touched a year low, having dropped by more than 50% from its yearly highs achieved this past winter. The industry has suffered from a slow and steady downtrend.
In that last week of August, many of the industry leaders entered oversold territory. Case in point, Aurora Cannabis (TSX:ACB)(NYSE:ACB) had a 14-day relative strength index (RSI) of 24. This was a technical sign that the stock was oversold.
Is another bounce imminent?
It is certainly looking that way. Here we are in September, and once again, the industry is rebounding. The Marijuana Index is up 10% from its August low. For its part, Aurora Cannabis is also up by 10% from its lowest close of the year -$7.34 on August 30.
Last year, Aurora Cannabis touched a low of $6.09 per share in August before reaching a high of $13.71 in early October. This was a 125% gain in only two months. Although I don’t expect as big of a jump this September, double-digit gains are certainly possible.
Analysts have a one-year price target of $12.58 per share. This implies 52% upside from today’s price. Considering the market for edibles is approximately 50% the size of recreational marijuana, it is not out of the realm of possibility that Aurora’s share price jumps accordingly.
The cannabis industry remains speculative at best. The recent price weakness has improved relative valuations, but the majority still aren’t cheap.
At the end of the day, this is still an industry that trades on momentum and speculation. Fundamentals are often ignored as a new crop of investors look to the cannabis industry to get rich quick. Unfortunately, this is late in the game, and the fast money has been made. Don’t expect triple-digit gains over the short term.
That being said, there is still an opportunity for those with a high risk tolerance. Given the impending legalization, now might be the perfect time to start a position in stocks such as Aurora Cannabis. The cannabis industry is following a similar pattern and is setting itself up for a strong September.
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Fool contributor Mat Litalien has no position in any of the stocks mentioned.
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