Marijuana Stock Market Outlook
The Let’s Toke Business Marijuana Composite declined for the third consecutive week posting a loss of 2.5%. This is probably a sign that we’re entering the summer doldrums for stocks in general and the cannabis group in particular. Investors seem bored and distracted as the provinces continue to get ready for the October 17th kickoff of sales of legalized cannabis through dispensaries. This week it was British Columbia announcing 31 Licensed Producers were selected as suppliers. Emerald Health was hit hard on the market on Friday as it failed to make the list of 31.
The new LTB Marijuana momentum Index continues to send out worrying signals. What this means is the vast majority of cannabis shares are participating in the current decline. Last week, for example, three out of four stocks declined in price. This simply confirms our opinion that the sector will remain soft over the summer preparing to advance post-Labor Day. We are not looking for a major sell off in the sector although the momentum index certainly doesn’t inspire much confidence. So enjoy the summer as it appears cannabis buyers have gone on vacation.
The LTB Licensed Producer Composite Index marginally outpaced the LTB Marijuana Composite posting a decline of 2.1%. The markets assessed Emerald Health (TSXV: EMH) a major penalty for not making the list of 31 suppliers to the B.C. government. EMH dropped 12.6% on Friday and 16.4% on the week. EMH accounted for nearly 25% of the loss in the LTB LP Index last week. We continue to favor this group and suggest readers act sooner rather than later if you are inclined to buy. Our picks are Canopy (NYSE: CGC), Organigram (TSXV: OGI) and Sunniva (USOTC: SNNVF).
The Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp. surrendered 3.8% of its value last week. The components of the 3Ci most closely reflect the LTB LP Index and the similarity in trends is evident looking at the two charts. Of course, you have to adjust for the greater volatility that this index has demonstrated for several months. We continue to use this index in our day-to-day portfolio due diligence.
The LTB Low-Priced Index that measures the microcap stocks in the cannabis group outperformed the LTB Marijuana Composite by a small margin posting a decline of 2.4% last week. We believe this sector will have a strong rally before the current cycle ends. Readers might wonder why we keep refocusing on recommendations such as Lexaria (OTCQX: LXRP), Khiron Life Sciences (TSXV: KHRN) and Sunniva (CSE: SNN). The reason is we know after these stocks make a major advance, readers will ask, “Is it too late to buy?” It is not too late if you’re buying now.
This chart plots the short term uptrends and downtrends in the cannabis group. We have now had three consecutive weeks of lower prices and based on past experience after possibly one more week of declines, some positive weeks probably lie ahead. Overall, we do not anticipate a major rally until after the summer break is over but from a short term low, we could see some solid returns on individual stocks. Although we have had mostly positive experiences when rebalance cannabis holdings in portfolios meant taking some profits, the next six weeks could be a good time to rebalance your holdings by restoring the allocation to cannabis holdings.