Ted Ohashi's Marijuana Stock Market Review & Outlook
This week I begin with a look at the major markets. Recently both the Dow and the TSX entered negative territory for 2018. A quick review of the leading international markets shows a similar pattern. These markets are driven by economic growth that appears to be slowing, the direction of interest rates that appear to be rising and the concern that variables such as this will lead to lower corporate profits. None of this matters much to the cannabis group although one has to admit that it is easier paddling with the current than against it.
But taking that into consideration, this is a great time to make sure you have some diversification into the cannabis sector. I believe that not only will the diversification reduce the risk of portfolios, the higher rates of return that can be expected from the cannabis group will also enhance long-term portfolio returns.
The Let’s Toke Business Marijuana Composite Index continues to meander lower posting a loss of 2.1% last week. Investors are clearly over Constellation Brands (NYSE: STZ)/Canopy (NYSE: CGC) v2.0. We are quietly biding our time waiting for a major event to fuel a cannabis stock market rally. It is looking more and more as if that will come in the form of a political development in the U.S. Perhaps the introduction and passage of the Strengthening the Tenth Amendment Entrusting States (STATES) Act will to the trick. We remain positive for the passing of the Hemp Farming Act although we don’t think that will generate enough enthusiasm to fuel the entire cannabis market.
The LTB Marijuana Stock Momentum Index continues to point lower as prices fall. As regular readers know, we follow momentum with more conviction than the price indexes so this is a time we are watching it very closely. In the momentum calculation, each component carries the same impact as every other one. With prices, of course, a larger price change carries more weight than a smaller price change.
The LTB Licensed Producer Composite Index seems to have joined the crowd instead of leading the pack. Last week, the LPs declined 1.8% which was a little better than average but enough to be noteworthy. At this point in time, it is only prudent to ensure you remain focussed on the financially stronger companies. In The Cannabis Report Model Portfolio, for example, three of the seven stocks are LPs (Canopy, Organigram and The Green Organic Dutchman). When you add in the cash position, 45% of the portfolio has exposure to the “survivors” in a bad market.
This chart shows the North American Marijuana Index (NAMI) published by MJIC. It is a price index comprised of thirty-four Canadian and U.S. stocks that are rebalanced to equal weighting every quarter. The NAMI gives us a more accurate reading of the group of stocks we cover. It can also be used to follow the markets inter-day. The NAMI declined 3.0% last week but is up 58.8% over the previous 12-months and is down 3.9% in the year to date. This will be our go to index moving forward.
We said last week that the LTB Low-Priced Composite was close to an oversold position and the numbers may be starting to show it. While the LTB Marijuana Composite and Licensed Producer Index posted declines in the week previous, the Low-Priced Composite recorded a gain of 0.9%. It’s not such a big deal on the surface of it because “One swallow does not a summer make.” So we need more than one week. But every turn has to start somewhere and while we watch momentum for negative guidance, the Low-Priced group might be getting back into the game.
Conclusion: Not enough to alter our message for now. So remain careful and cautious. Security selection is more difficult these days and proper portfolio management policies can help improve your returns. I hope you’ll find this a good time to be a Let’s Toke Business reader while following me on Seeking Alpha and The Cannabis Report Model Portfolio.