Ted Ohashi's Marijuana Stock Market Review & Outlook
This week we are compelled to start with a look at the major markets. The Toronto Stock Exchange lost 2.6% on the week to close at a low for 2018. The Dow Jones fared even worse with a loss of 4.5%. So the positive background for the cannabis stocks we expect did not materialize last week. That doesn’t mean it won’t. We still think it will.
In the meantime, the Let’s Toke Business Marijuana Composite Index posted a loss of 4.1% in a week of violent fluctuations up and down. On Tuesday came the explosive report Hindenburg/and Quintessential that did a hatchet-job on Aphria (TSE: APHA) and tore 27.7% of the value of the company. On Wednesday as the U.S. markets were closed, APHA surrendered another 17.2% as additional negative news was promised for Thursday. When the news seemed more directed at Liberty Health (CSE: LHS), APHA rebounded 51.0% before falling back another 8.2% on Friday. In the meantime, on Tuesday, Cronos (NASDAQ: CRON) confirmed the rumours they were in discussions with Altria (NYSE: MO) the world’s largest tobacco company by sales. CRON was one of the few companies able to buck the wave of selling that was swamping the cannabis stocks. Then on Friday, when the terms of a Cronos/Altria deal were announced, the stock added 21.7%. So week saw two major announcements – one for the bulls and one for the bears. So far the bears are winning.
This theme continues to be supported by the LTB Marijuana Stock Momentum Index fell faster than prices again last week. On the week there were 4.5 stocks that declined in price for every one that advanced. While there are instances when momentum outperforms prices (which is positive) and even times when momentum goes up as prices go down (which is exceptionally good), we don’t see that happening right now. As long as that is the case, we will remain cautious about the outlook as we have been except for a brief period following Canopy/Constellation II.
The LTB Licensed Producer Composite Index was able to outperform the LTB Marijuana Composite posting a decline of 3.2%. This may seem somewhat surprising since Aphria is an LP and included in the index and Aphria had a dreadful week. But we can’t overlook the fact that Cronos had an exceptionally strong week especially when you consider it had to buck the Aphria headwinds. Without the bear raid on Aphria, one would expect the LPs would have had a strong week. So as we consider the outlook for the LP stocks, we have to monitor Aphria and its ability to defend itself. An internal committee is simply not enough. Given the billions of dollars the LPs have spent on hundreds of acquisitions, if Aphria is unable to answer the questions raised by Hindenburg/QCM, investors will begin to question all of these transactions.
This chart shows the Canadian Marijuana Index (CMI) published by MJIC. This index is comprised of eighteen Canadian cannabis stocks that are rebalanced to equal weighting every quarter. Here we are showing the five day chart just to demonstrate how volatile prices were last week. On the week, the index fell 2.5% which you would think was within trend until you look behind the scenes. As you can see, there was one extended decline that ran from approximately Tuesday when the Hindenburg report was published through the next day. ow the markets inter-day. This was followed by two decent recoveries that carried the index to its close. So as you lived through the week, the overall decline masked a very stressful week for most investors. Next week promises to be more of the same.
The LTB Low-Priced Composite continued to decline sharply with a loss of 5.8% last week. As regular readers know, this index does measure the performance of low priced cannabis stocks but we also use it as a measure of investor sentiment. When the index is low as it is now, the level of optimism is also low. So when you consider the bear raid on Aphria last week, you know it would have turned those investors grimly hanging on to their higher risk stocks from optimists to pessimists. We expect this index will turn up as bullish investor psychology grows but that may be a while yet.
Conclusion: Readers may grow weary of my persistent message but I have to keep expressing my belief. It is a time to remain cautious. In this market pessimism prevails. Next week Liberty and Aphria have promised to address the concerns raised in these reports. It seems Liberty will reply on Monday and Aphria on Wednesday. This promises to generate more volatility. Readers can watch for the response. If the market reacts positively, it suggests the rebuttal has gained some traction. But if the market sells on the news, it could exacerbate an already difficult market. We’re not ignoring the fact that we have recently pointed to a rally after tax loss selling ends between Christmas and New Year’s. But in the markets, you have to keep assessing and reassessing new information and last week produced a plethora of new information.