Ted Ohashi's Marijuana Stock Market Review & Outlook
The Let’s Toke Business Marijuana Composite Index posted its sixth consecutive weekly decline posting a loss of 0.6%. Last week we said the cannabis market needs another “event” to drive stock prices higher. We see such an event in the week ahead – the U.S. midterm elections. For the Democrats to take back control of the House, it only requires a typical midterm result. The Senate is a more difficult matter but within the realm of possibility. We think one of these outcomes is likely and has the potential to trigger a major rally in stock prices. (See Marijuana Matters below).
The LTB Marijuana Stock Momentum Index remains in an established downtrend although this past week, price and momentum stayed in line. However in an event driven market, some trends can change rapidly. If the Democrats can make meaningful headway in the midterm elections next week, both prices and momentum can reverse sharply. So momentum is flashing a caution light and we shouldn’t forget it. But we do expect a positive impetus from the U.S. elections next week.
The LTB Licensed Producer Composite Index declined 0.8% last week. Although the index has been underperforming in recent weeks, the index still stands in a reasonable position. Again, if the U.S. market receives a boost next week, we anticipate the larger LPs to do well. Most of the larger companies in this group have arranged ways to invest in the U.S. So if the U.S. election triggers a rebound next week, we expect the LPs to resume their leadership role and outperform on the upside.
The Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp. posted a gain of 2.8% last week after a substantial decline the week before. This is simply the index continuing to be more volatile than average. These days we find it more important than usual to use the 3Ci to follow intraday changes in prices and trends. In markets like this, opportunities come and go during a trading day.
The LTB Low-Priced Composite continues to lag badly. As readers know we use this index as a mandate for investor psychology. If the index is rising sharply, it is an indicator of rising optimism which is negative. If the index is falling, it is a sign of growing pessimism which is positive. So we take the recent decline to indicate a lack of optimism. This is proven out in the performance of the Composite and Licensed Producer Indexes recently. Investor optimism has proven to be very fragile and even the larger LPs have had stock performance more in line with high risk stocks.
This chart shows the average length of rallies and corrections in the LTB Composite Index. What it shows is that in 4½ years, there have only been three corrections that have extended longer than the current six weeks. This suggests that our expectation of a recovery in the cannabis stocks next week triiggered by the U.S. midterm elections fits well with the where we stand in the overall market. We are near the end of a larger and longer than average correction in the Trading Phase which is a time to spend some cash to take advantage of the drop in prices.
Conclusion: regular readers will know we are now well into the Trading Phase of the cannabis stock market cycle. This is a time of larger price fluctuations and the portfolio strategy we advise is to buy on weakness and sell into strength. For example, consider the Green Organic Dutchman (TSE: TGOD) at $3.49 per share. This is a well-known and widely followed Canadian Licensed Producer. The stock closed at $8.78 per share on September 20, 2018 and traded at an intraday high of $10.24 per share this year.
I have liked and followed TGOD for many months before they went public in early May 2018. I was set to recommend it to readers but the stock moved higher before I could complete my due diligence. Of course, the other factor was a large number of shares came free trading on November 2, 2018 so as that date approached, the price fell faster and farther than most people expected. Even at the closing price of $3.49 on Friday, the stock had bounced off a closing low of $2.88 per share the day before. But catching a stock at its absolute bottom is more a matter of luck than skill. At this price investors are buying the stock below the Initial Public Offering price of $3.65 per share approximately six months ago. The stock price was exceptionally weak for a reason we can identify and I think it will rally higher now that November 2nd is behind us.
TGOD is a well-financed LP that is focused on organically grown cannabis which gives it an immediate advantage in branding and marketing its product. I will provide a more detailed report on the company but right now I think it is more important get a position in portfolios. For example, in The Cannabis Report Model Portfolio, I am initiating a position in TGOD at $3.49 per share on Monday.