Ted Ohashi's Marijuana Stock Market Review & Outlook

The trends in the major markets become more important to the cannabis stocks. Last week, the TSX fell 1.4% and the Dow was down 1.2%. These are large weekly changes for these indexes that are being impacted by the fear of higher interest rates, a slowing economy and on many fronts, a bear market. We expect the major markets will turn up around Christmas because the post midterm election year is typically strong. In fact, since 1940, the stock market has never declined in a post midterm election year. We can see why as President Trump’s administration begins to gear up for the 2020 Presidential election. That will include preparing the economy to be in a favorable stage when voters go to the polls.

This week also provides a good learning opportunity with respect to price indexes. The Let’s Toke Business Marijuana Composite Index posted a gain of 0.1% on the week. But as the momentum index shows, the market was actually lower. In fact, although the index was essentially flat, there were two stocks that fell in price on the week for every one that advanced.

Also a review of other cannabis indexes suggest prices were indeed lower. The Canadian Marijuana Index (CMI) published by MJIC declined 4.9% on the week and converted the one year return from a gain to a loss of 2.2%.

What can account for the difference between the readings from the two indexes? One important difference between the LTB Composite and the CMI is the number of stocks in each index. There are more than 125 in the LTB Composite compared with just 18 in the LTB Composite. However, the CMI and momentum are more aligned in their results and regular readers know, when there is a discrepancy, we stick with momentum. In any case, this all fits very well with our outlook that remains changed. We expect the cannabis group to remain under tax loss selling pressure until after Christmas after which we expect a significant rally in prices.

As you read on you will note another major anomaly in the group this week.

The LTB Licensed Producer Index declined 1.8% last week and momentum was even worse with only one stock advancing for every four declining. The index is now clearly in a downtrend and may continue under pressure as Aphria’s (NYSE/TSX: APHA) promise of a line-by-line rebuttal of the Hindenburg/Quintessential Capital Management (H/QCM) report by Wednesday last week, turned into a promise of a line-by-line rebuttal “…as soon as possible” after completion of its internal review by the independent committee. As I said last week, I really don’t think a committee made up of “independent” directors can be considered “independent” on assessing this matter. In my opinion, once a person accepts the position of director, they move from being outside the tent peeing in to being inside the tent peeing out. They may now have compensation arrangements, stock options and other benefits that serve them better if Aphria’s stock is high and rising. So there is a built in conflict of interest in my opinion.

Nonetheless, I think what we’re looking at now is a delay of weeks and perhaps months into the future for APHA’s response. As a result, we believe Aphria stock price will be a consistent underperformer moving forward unless and until they are exonerated of the allegations made by H/QCM. Their strategy suggests to me that there is a cloud over the Cormark Securities “fairness opinion” on the Latin American investments. This is also consistent with there being many difficult issues raised in the H/QCM reports that cannot be refuted as easily as one might expect if the allegations were completely without merit. Finally, Vic Neufeld, APHA Chief Executive Officer, must be careful what he says until the report is issued.

I would add that the longer it takes, the more damaging the final report is likely to be. As I have often said, “Good news comes early. Bad news is late.”

If the report requires weeks to be completed, I think the market will separate the rest of the Licensed Producers (LP) from APHA. If the market turns after tax loss selling season ends, I believe the other LPs but investors will remain wary of APHA that will be left behind.

In the H/QCM report was a claim by a former employee that APHA had failed Health Canada audits, had problems with mold and bug infestations and ended with the statement that “Every single room that has product in it in that (Leamington) facility right now has bug problems.” This is something that APHA could easily rebut but they haven’t. I am also a little bit concerned at the silence of other Ontario growers who could easily distance themselves from these allegations with simply worded denials about their grow facilities.

I promised you another surprise in this week’s numbers and here it is: The LTB Low-Priced Composite 5.6% this week. This was not a fluke where the price of one stock rose so much as the skew the results. In fact, there were four low priced cannabis stocks rising in price for every one that declined last week. It is almost as if there was a disconnect between these stocks and the rest of the cannabis market. At this time, it is too early to say if this is the start of something important or a simple anomaly. I guess we will have to wait a couple of weeks to find out.

Conclusion: We are getting all sorts of mixed messages as we approach the end of 2018, a year most investors would like to forget. I am sticking with my expectation that the cannabis stocks will likely remain under pressure from tax loss selling until after Christmas day. At that point, I expect an improvement in the stock markets in general as the U.S. administration prepares for the 2020 Presidential elections. At that point we will also look for cannabis stocks to resume an uptrend.