Can Cannabis Cure COVID?
Matt Weller, CFA, CMT May 26, 2020 1:10 PM
The once-hot marijuana sector has been beaten to a pulp, so any hint of good news is enough for bears to cover short positions.
To answer the question asked in the title up front: Probably not.
But that hasn’t stopped traders from bidding up the stocks of beaten-down marijuana companies following a Canadian study from the University of Lethbridge that showed high levels of CBD, a non-psychoactive compound in marijuana plants, could reduce COVID-19 infections by “up to 70 to 80 percent” by blocking ACE2 pathways that the virus uses to enter the body. The study suggested that eventually, cannabis could be used to “develop easy-to-use preventative treatments in the form of mouthwash and throat gargle products [with the] potential to decrease viral entry” through the mouth.
Beyond sounding like a theory your college roommate would come up with at 2am, it’s worth noting that the study has not been peer reviewed and even the original authors indicated that substantially more research is needed. Nonetheless, the once-hot marijuana sector has been beaten to a pulp, so any hint of good news is enough for bullish traders to hop on board and bears to cover their short positions. The widely-watched “Alternative Harvest” ETF (MJ) was down fully -80% from its Q4 2018 peak to the mid-March low before recovering over 60% off the lows as of writing:
Source: TradingView, GAIN Capital
As the chart above shows, the industry ETF just saw its short-term 21-day EMA cross above its medium-term 50-day EMA, signaling a possible shift to a bullish short-term trend for the first time since January 2019.
In terms of specific names to watch, the ETF’s top holdings include GW Pharmaceuticals (GWPH), Cronos Group (CRON), Canopy Growth Corporation (WEED) and Aurora Cannabis (ACB). Turning our attention to those charts, our favorite potential bullish setup of the bunch may be GWPH, which trades at “only” 10x sales and has already recovered to trade back at 6-month highs, forming a near-term trend of higher highs and higher lows in the process:
Source: TradingView, GAIN Capital
Needless to say, this entire group of small-capitalization stocks in a nascent industry will remain highly volatile in the weeks and months to come, regardless of the situation with the global pandemic. That said, a return of the speculative interest in such potentially high-growth names could be a sign of “animal spirits” returning and present compelling trade opportunities in the coming days.
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