Marijuana Stock Market Review and Outlook

The Let’s Toke Business Marijuana Composite declined for the fourth week in succession with a loss of 2.9%. The persistent weakness in prices of cannabis stocks over past four weeks has biased our expectation to the downside over the thirteen weeks between now and the first legal sale of recreational cannabis in Canada. We had been expecting a generally flat trend over the summer with a rally leading into October 17th. That expectation hasn’t changed except we are probably a little more cautious about the markets between now and then.

The main reason for our increasing caution is the continued weakness in the LTB Marijuana momentum Index. For example, in the past week over four cannabis stocks declined in price for every one that rose in price. As we have repeated regularly, when prices and momentum diverge, we follow momentum. This confirms our view that the cannabis stocks will remain soft over the summer months and prices will likely remain lower. We continue to look for a price rally between Labour Day and October 17th but only special stocks with outstanding potential can be expected to buck this trend.

The LTB Licensed Producer Composite Index modestly outperformed the LTB Marijuana Composite posting a decline of 2.7%. The chart to the right shows the performance of the LPs compared to the average Canadian cannabis stock. By rising to the right, the LP stocks are outperforming the averages. This is a reason for some optimism as the higher quality stocks are leading the way.

The more volatile Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp. performed as expected recording a double digit loss of 13.2% last week. Trading started with two down days and an anemic rally on Wednesday was unable to hold as the period under review ended with two more negative sessions. This means the 3Ci has joined the LTB price indexes on the downside which is another reason supporting the expectation of general weakness until around Labour Day. Traders can watch for opportunities to buy stocks that are particularly hard hit.

The LTB Low-Priced Index that measures the price performance of the more speculative stocks in the cannabis group declined 1.9% last week that outperformed the LTB Marijuana Composite by a small margin. The chart to the right shows the performance of the Low-Priced stocks relative to the average cannabis stock. We like the fact that the index has been doing comparatively well since mid-March. We expect leadership from this group before the current cycle ends which explains our current focus on smaller cap companies.

Conclusion: the cannabis stocks continue to show lacklustre performance overall. We expect the group to be dull until Labour Day with a bias to the downside. The stocks that we consider buyable in this environment are those with strong fundamental characteristics and stock prices that have been knocked down more than is justified. There are three stocks that fit this bill from our point of view: Khiron (TSXV: KHRN), Lexaria (OTCQX: LXRP) and Sunniva (CSE: SNN).