• Ted Ohashi

How close are we to a bear market for cannabis investors?

QUESTION: I am a reader who has been putting his money where your mouth is. I have a couple of questions:

  1. 1. You have mentioned previously that we are in a phase that will eventually shift into a bear market for cannabis stocks. How close do you think we are to that bear market, and what are the indicators you are watching to make this determination?

  2. 2. So far, summers have been pretty dreadful for cannabis stocks. Do you anticipate a similar slump this summer — or do you think our market has sufficiently matured past the “penny stock” phase to suggest that the current bull market could continue through the summer months of 2019?

T. R., Atlanta, from Georgia, United States

ANSWER: The indicator that has my full attention at this time is the upcoming Canadian Federal election. As we sit and watch our Prime Minister self-destruct, I am reminded of this quote from Don Cherry, a well known hockey colour commentator who said, “I preferred the time in Canada when the Prime Minister and the Village Idiot were two different people.”

Many of you were not readers back in 2015 when the last federal election was contested. The Conservative Government and Prime Minister Stephen Harper had been in power for nearly a decade. Their major problem was illness and fatigue – the voters were sick and tired of them. The official opposition was the New Democratic Party (NDP) who had ridden the emotion of a popular leader who had become terminally ill and died just prior to the previous election. They could not hope to maintain such a lofty position and they did fall precipitously. But the Liberals were in a tough spot as well. They were unaccustomed to being out of power for ten years and didn’t have an obvious leadership candidate. Their appointment of Justin Trudeau, son of former Prime Minister Pierre Trudeau, was seen as an act of desperation. Taking advantage of someone with more style than substance. Marijuana legalization was almost an afterthought in their election platform ranking far behind issues such as open and transparent government, equality of women, reconciliation with the indigenous people and election reform.

The incumbent Conservative Party saw the Liberal legal marijuana plank as a potential weakness. At the same time, an anti-cannabis position was natural to the party that is often compared to the Republicans in the U.S. The Prime Minister stumped the country telling lies and half truths about the evils the marijuana. From the perspective of cannabis, it was a terrible performance. But despite their election loss and a consensus view that it their anti-pot performance certainly didn’t help and probably hurt, it has only been four years and I suspect those strong anti-cannabis are still well entrenched in the party.

If the Conservatives retake power in the next election, and right now the polls point to such a result, they cannot put the cannabis genie back in the bottle. Legalization is here to stay and even the Conservatives admit as much. So while they can’t reverse what has happened, they can certainly impede its progress. Plus we mustn’t forget Canadians are a forgiving people. You have to be a stumblebum of major proportions to not be given a second chance at the polls. So we could be looking at eight years of Conservative Party driven uncertainty and frustration for cannabis investors and operators. Such a result would have a devastating impact on the shares of companies operating primarily in Canada. Under such circumstances, we could see the cannabis cycle flip over into a bear market starting this summer.

Obviously I think investors will begin to differentiate between Canadian based and non-Canadian based operators which is why I like the companies that I do. So we could have an independent bull market for cannabis stocks with operations in the U.S. such as 1933 Industries (CSE: TGIF) and Sunniva (CSE: SNN) and internationally including the U.S. such as Khiron Life Sciences (TSXV: KHRN) and Lexaria Bio (CSE: LXX) (OTCQX: LXRP).

This is a perfect segue into your second question. The problem with predicting cannabis cycles in the summer is some’re up and some’re down. But clearly the Canadian election polls will impact what will happen in Canada. In the meanwhile there are some very positive changes starting to come out of Washington, D.C. So it could be another quiet summer for Canadian operators but I suspect the shares of U.S. and international operators will fare much better.

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