The next catalyst for marijuana investors may come from an obvious place: Big Tobacco.

While alcoholic-beverage companies have been active in the marijuana industry, Big Tobacco curiously has not.

But new comments made by an Altria MO, -1.60% executive show that the company is evaluating opportunities in marijuana. Altria owns Phillip Morris USA, which makes Marlboro cigarettes. Before digging deeper into the logic of cigarette companies getting into marijuana, let’s review marijuana stocks with the help of a chart.

Chart

Please click here for an annotated chart of marijuana stock Canopy Growth CGC, -8.97% , and note the following:

• The chart shows the sell signal given by The Arora Report in June right at the prior peak. Subsequently the stock lost more than one-third of its value.

• The chart shows The Arora Report signal to buy Canopy Growth. When The Arora Report gives a buy signal, it simultaneously gives a target zone and a stop zone.

• The chart shows when Constellation Brands STZ, -1.02% , perhaps best known for Corona beer, invested about $4 billion in the company, paying a whopping premium of 51%.

• Just prior to the Constellation Brands investment news, Canopy Growth was well on its way to lose one-half of its value from the peak because it reported earnings below the consensus and significantly below the whisper numbers. Stocks move based on the difference between reported earnings and projections compared to the whisper numbers.

• The start of an “up” move in a stock on heavy volume is considered positive. The chart shows that there was heavy volume when the present up move started.

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• The chart shows when Canopy Growth stock reached the price that Constellation Brands paid. The chart shows a red candle at that time, indicating that sellers were coming in. This was perfectly reasonable behavior on the part of the sellers because, under normal circumstances, the stock would have likely pulled back.

• The chart shows that after the red candle, rumors of more deals in the marijuana industry started. Those rumors moved the entire marijuana sector, including the Alternative Harvest marijuana ETF MJ, -6.32% , Tilray TLRY, -12.39% , Neptune Technologies NEPT, -8.82% , Aurora Cannabis US:ACBFF, Aphria US:APHQF and Cronos Group CRON, -4.89% .

• Subsequently, rumors gained credibility on the news that Diageo DEO, -0.50% , the maker of Smirnoff and Johnnie Walker, was in talks with at least three Canadian cannabis companies.

• The chart shows the Arora signal to take more partial profits and to raise stops to protect the remaining profits right at the peak of the rumors. Afterward, a shallow pullback occurred. In highly volatile stocks, it is common for unrealized profits to turn into losses. For this reason, the trade-management guidelines that are provided to The Arora Report subscribers call for taking partial profits, usually in small tranches at appropriate times and raising stops. In practice, there are more nuances and more complexities that investors need to learn to consistently make profits than the simple foregoing statement. The foregoing statement is kept simple for the sake of readability.

• A short squeeze occurs when short sellers feel compelled to buy a stock to cover their shorts. A short squeeze temporarily causes an exaggerated move to the upside. Anticipating such a short squeeze, the chart shows the Arora buy signal to add for super-aggressive investors. The chart shows that a short squeeze did in fact occur.

• A technique that consistently adds to profits is to take advantage of a short squeeze to take partial profits. This is exactly what we did as shown on the chart.

• The chart shows falling volume after the rise. This is a slight negative, indicating that those motivated by FOMO (fear of missing out) may have already bought the stock.

• The chart shows that the relative strength index (RSI) has diverged. In plain English, it means that while the price of Canopy Growth stock continued to go higher, RSI was going lower. This is normally a sell signal for the short term. Such RSI signals work well in the short term when combined with segmented money flows. However, such signals often mislead investors into selling early when used alone or in strongly trending stocks that have not gone parabolic. Segmented money flows provide investors a significant edge. To learn more about segmented money flows, please see “11 marijuana stocks’ money flows show which are investor favorites.”

Mixing tobacco with marijuana

Here are the seven reasons why tobacco companies such as Altria, Phillip Morris International PM, -0.40% , British American Tobacco BTI, +0.60% , Turning Point Brands TPB, -3.31% , Alliance One US:AOI, Universal Corp. UVV, -2.67% , Vector Group VGR, -1.71% and Imperial Brands IMBBY, -0.16% are likely to get into the marijuana business in a big way.

1. In many ways, the marijuana business is complementary to their existing tobacco business.

2. Cigarette companies are facing declining sales, and they are looking for growth levers. Marijuana is likely to see explosive growth over the coming years.

3. Even supposedly lower-risk tobacco products are beginning to increasingly come under attack for their health risks. In contrast, sentiment is building about the benefits of cannabis, and risks of cannabis are falling in the background.

4. Tobacco companies are rich, and they have the money to get into the cannabis industry.

5. Not too far in the distant future, branding will become a big part of the success in cannabis. Tobacco companies already know how to develop successful brands.

6. Tobacco companies already have huge distribution networks. They can easily add cannabis to those networks down the road. Right now, regulations are not likely to allow this, but tobacco companies are experts at lobbying.

7. Marijuana companies have to deal with a maze of regulations. Tobacco companies are already experts at handling regulations.

What to do now

Tobacco companies will likely provide a big step for marijuana investors to make multimillions. However, investors will need to be patient and be tuned to sources that can alert them early. Further, investors need to be careful with marijuana stocks because of their high valuations and high volatility. Investors will need expert guidance. Without expert guidance, it will likely be easier to lose money in marijuana stocks than make money.

Even with expert guidance, marijuana stocks are not a get-rich-quick proposition. This will not be a straight line up. There will be ups and downs even with expert guidance.

One technique that investors can consider is trade-around positions. In this technique, investors slowly build a core quantity when stock prices become attractive for the long term and then trade around the core position in shorter time frames. Proper diversification will also be important. Learning how to properly size positions will be essential.

In a nutshell, it will take knowledge, discipline and lots of patience on the part of investors to be successful in marijuana investing.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.