Why Curaleaf Stock Dropped Today

Key Points

• President Trump posted a pro-marijuana video on Truth Social yesterday.

• Curaleaf stock promptly leapt 37%.

• The stock's giving back some gains today, but still looks expensive.

• 10 stocks we like better than Curaleaf ›

Curaleaf Holdings (OTC: CURLF) stock, an over-the-counter traded, Stamford, Conn.-based cannabis company, tumbled 5.9% through 11:40 a.m. ET Tuesday after soaring 37% on Monday.

I don't think investors need to worry too much about the retreat, however. It looks to me a lot like momentum traders simply taking some profit off the table after a single fabulously successful trading day.

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Image source: Getty Images.

Time to take some profits

President Trump posted an infomercial yesterday on his Truth Social account, in which a nonprofit group called The Commonwealth Project urges the president to grant Medicare coverage of medical marijuana use for senior citizens. More generally, the video argues cannabis should be used to treat illnesses related to the "endocannabinoid system" instead of using "dangerous and addictive pharmaceuticals" sold by the traditional pharmaceutical industry.

It was this video that caused Curaleaf stock to spike yesterday, creating the profits that momentum traders are now removing from the table. But here's the important part: There's no new bad news today that would otherwise prompt selling Curaleaf stock.

Is Curaleaf stock a sell?

That doesn't necessarily mean it's a bad idea to sell now, however. After all, the stock does cost 37% more today than it did just 24 hours ago, and a single post on social media may not entirely justify Curaleaf's new price.

As I look at it, with $50 million in trailing free cash flow, Curaleaf currently sells for nearly 50 times FCF -- a pretty high price to pay, given we don't 100% know yet that President Trump is going to push for marijuana legalization... or that Congress will give it to him... or that Curaleaf will be profitable enough when selling legal marijuana to justify its new price.

When trading a pricey stock, err on the side of caution.

Should you invest $1,000 in Curaleaf right now?

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.