Pro-cannabis Liberals odd-on favourite to win federal election

Last week I reported on a shift in the political winds in Canada that is favourable for the cannabis stocks. This is summarized in the table to the left. What it shows is the incumbent, pro-cannabis Liberals are now given a 56% chance of winning a majority or minority, that is, forming government. About a month ago, the opposition, anti-cannabis Conservatives held a 53% edge and looked unbeatable. Could it swing back from the Liberals? Of course. But the other two parties (Conservatives and NDP) have such poor leadership they make Trudeau look reasonable. I will watch the polls closely but I really don’t see any big comebacks that see the Conservatives winning. What I am most nervous about is Trudeau stepping on his own tail and losing the election.

I think a look back at the 2015 election will give us an idea of what might transpire for cannabis stocks before and after the upcoming election.

The chart below plots the Let’s Toke Business Marijuana Composite Index in the year leading up to the last election, a surprising win by the Liberals. You might remember that both parties expressed strong views about cannabis during the campaign. The Liberals planned to legalize marijuana and tax it to divert money away from organized crime, regulate it to keep it out of the hands of children and prevent Canadians from having criminal records for possession of small amounts of cannabis.

In the year leading up to the election, the markets were volatile. Although the Liberal win wasn’t shocking, the margin of victory was a surprise. Clearly the cannabis stocks anticipated a positive result as the LTB Index began to rise two months before the election. That is why it is often said the market is not a thermometer but a barometer. A thermometer tells what the temperature is while a barometer tells you what the temperature is going to be.

Here is the chart of the LTB Marijuana Composite for the past year. Of course there are still 6 – 7 weeks to go before the October 21, 2019 election and we have seen, public opinion can turn 180° in very little time. But in the year leading up to this election, the market has also been volatile, especially on the downside. In fact, I have been calling it a cannabis stock bear market.

If we assume the Liberals continue to lead the polls and/or even move to a stronger position, I think we can expect the cannabis stocks to respond the way they did in 2015 leading up to the election. We could actually have a six week rally. Not necessarily straight up but trending up as it did four years ago. The chances of this happening are even more likely given that the LTB Marijuana Index dropped for 18 weeks in a row before this week.

What is likely to happen afterwards? Looking back at 2015/16, here is what we can learn. Bearing in mind the Liberals did win then and they haven’t won now, in the year following the October 19, 2015 election the LTB Marijuana Index rose 117%. After the 2015 election, a number of things happened that were news to us new to us. It created a lot of excitement, investment and speculation. Some of the highlights are shown on the chart below in relation to the market action of the stock price index.

Conclusion: September 6 – October 21, 2019: As the cannabis stocks have been declining for 18 weeks in succession, I think a cannabis stock rally is overdue. Because and as long as the Liberal polling numbers remain favourable for their re-election chances to form government, I believe the cannabis stock market will rally. In the short lead up to the 2015 election, the group rose 9.0% in eight weeks for an annualized rate of gain of almost 60%. But in the year prior to the 2015 election, the cannabis stocks were actually up whereas in the year leading up to the current election the market is sharply lower. So if the political winds continue to blow favourably, I believe the rally between now and the 2019 election, the rally will be stronger than it was last time.

Conclusion: October 21 – forward: in the year following the 2015 election, the market rallied 117%. This was an exciting time. Even though Trudeau and the Liberals had promised legalization, no one knew for sure. It wouldn’t be the first time a newly elected government reneged on a campaign promise. Meanwhile the number of Canadians in favour of cannabis and legalization continued to grow. The clincher was the announcement by Health Minister Jane Philpott to the United Nations General Assembly Special Session on Drugs. On 4/20, a significant day in the cannabis world, Philpott announced that Canada would legalize cannabis and introduce legislation by spring 2017. This would make Canada the first G7 country to legalize.

The current environment for cannabis is not nearly as ground breaking but it is still exciting. Moving forward, there is approval of cannabis infused edibles and beverages and additional expansion of dispensaries, in the near term. So I think the market recovery over twelve months could be substantial but probably less than the speculative rally following the 2015 election. So if the 2015 post-election rally was roughly 100% in the LTB Marijuana Index, I would guess that the 2019 post-election rally could be, say, 50%. Of course, all of this depends on the Liberals forming government after the election making the polls extremely important from a short term investment point of view. It is also important to remain flexible. Prime Minister Trudeau has been particularly inept at keeping his foot out of his mouth.