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It’s fascinating to see an entire sector get punished by the investing community because of one stock. This is a phenomenon that gets amplified and multiplied in the legalized cannabis sector of stocks, and I’m watching it happen in real time – and pounding the table as this is a prime opportunity.

One company, which isn’t even in the top five list of the biggest cannabis companies by market cap, is getting battered today: the shares are down 24% because the CEO and co-founder announced that the company’s Q4 revenues are below expectations and because he decided to withdraw the previously issued FY2020 outlook.

Slashing the company’s stock price by nearly one-fourth in a single trading session might be considered an overreaction, but that’s neither here nor there; what’s really an overreaction is the “sympathy effect” that ensued, in which shareholders of other stocks in the same sector dumped their holdings as if the world were ending.

The North American Marijuana Index tumbled to a 52-week low and shed 8.43% on the day – a remarkable feat of irrationality, in my humble opinion. Both sides of the North American continent took a hit, with the Canadian Marijuana Index declining by exactly 10% and the United States Marijuana Index sliding 6.94%.

To add insult to injury, this took place on a day when the S&P 500 and other major-market indexes were flying high, as the President has just signaled the possibility of a partial U.S.-China trade deal. But then, pot stocks aren’t part of these market indexes – not yet, at least.

It’s all part of a downtrend that’s been in effect since the beginning of the summer:

Courtesy: MarijuanaIndex.com

And yet, I’m completely enamored of these pot-stock routs, as they provide rare opportunities to scale into positions with my favorite publicly traded cannabis companies. Disappointment in one stock – not even one of the biggest companies in the space – shouldn’t take down the entire sector, but it did, and the rational mind would seek to take advantage of that.

This message will resonate with contrarian investors, but it probably won’t provide much solace for folks already invested in cannabis stocks, especially if they’re down by 10% or more. If you’re in that boat, please understand that most cannabis stocks have been much higher than their current price, meaning that they’re capable of tremendous price appreciation given the right catalyst.

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What would that catalyst be? I think we’ll find out soon enough, as two-thirds of American adults support marijuana legalization and there’s a host of states on the verge of decriminalizing medical and/or recreational cannabis use. Arizona, Arkansas, Florida, Nebraska, Idaho, New Jersey, and Mississippi are among the states to watch in 2020 as voters are preparing to push through multiple pro-cannabis measures.

Or how about an entire country adopting full legalization before the end of 2019 – that’s a possibility in Mexico, where the courts already ruled last year that prohibiting the personal use of cannabis is unconstitutional. If full legalization is enacted there, Mexico will join Uruguay and Canada as the small group of nations in that category – leaving open the question of how much longer until the United States joins them.

California is giving us a clue, as Governor Gavin Newsom just signed a bill into law which will allow medical cannabis to be administered to students by parents in schools, as long as it’s not in smoking or vaping form and only if the local school board approves. Moreover, the parents must obtain a recommendation from a doctor prior to administering the cannabis product.

Courtesy: Gard3nNerd

Some of us will agree with that law and some won’t, but there’s little doubt that the 80+ years of marijuana prohibition is coming to an end and public support for legalization has grown considerably over the years. The progress of the past several years has been stunning, and properly positioned investors have made a killing despite the recent drawdown.

And so, if you’re already invested in pot stocks and you feel like you’re holding the bag, I would suggest considering a long-term outlook and remembering that “time in the markets” is more important than “timing the markets,” meaning that your timing probably wasn’t perfect but staying in the trade for a while is likely to reap greater rewards.

If anything, it’s a chance to get in or add to your position at a good price, assuming you have the capital and aren’t over-leveraging yourself. Stay safe and keep the faith, I say – a bright green day could be just around the corner.

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