Ted Ohashi's Marijuana Stock Market Review & Outlook
Introduction: regular readers will know the more detailed market outlook done last week is typically only done four times a year. But I sense we are at a critical point for cannabis stocks and this is a difficult time for investors, especially less experienced ones. As a result, I am going to have a detailed look at the market this week and perhaps next. If you follow my assessment from last week through this week and perhaps next, I hope it will help you manage your cannabis stocks in a more profitable manner.
Let’s quickly review the points I am trying to make:
I expect the major markets in the U.S. and Canada will be positive. In other words, as cannabis investors we will be swimming with the tide and not against it. My reasoning is U.S. presidents generally start stimulating the economy right after the midterm elections in the hopes the economy will be expanding at the next presidential elections. If anything, this will be more important for President Trump as the economy and stock market are the only aces he has left. But no matter which party has held the White House, since 1940 the market has never declined in a post-election year.
For the past several weeks, I have been cautious about the cannabis stocks and especially in December as this was the perfect year for tax loss selling in the cannabis stocks. So my forecast has been weakness in December giving way to strength after Christmas when tax loss selling ends.
I look for the U.S. based cannabis stocks to outperform their Canadian counterparts. This means companies with the bulk of their operations in U.S. should do better than those focussed on Canada. There are some reasons for this. First, the good news is pretty much out in Canada. What remains is the struggle to deal with the process of legalization. This has been the case in Colorado, Washington, Oregon and California and it will probably be the same in Canada. Second, I see the opportunity for a political breakthrough In the U.S. The Democrats have taken control of the House, both Jeff and Pete Sessions are gone and the states are adopting a more entrepreneurial approach to allowing cannabis businesses to flourish. Both countries are interested in collecting taxes but the tax and revenue grab at the Provincial and Federal level in Canada is something to behold.
The one year charts of the U.S. Dow Jones and the Canadian Toronto Stock Exchange Indexes show an upturn seems to be starting right on cue. Of course two weeks doesn’t make an irreversible trend but it supports my expectation. One thing that may be somewhat confusing is the number of experts and media commentators who argue the markets should be falling. To me their negative assessment is a positive sign. The worst thing we could see at this stage is everyone agreeing the markets should go higher. If that were the case I would run from the exits. You see, all the people who are negative today will gradually become more optimistic as time passes and fuel further advances in price. At a market high, we will have the maximum level of optimism and at the bottoms we have the highest level of pessimism. So a health level of skepticism at this time is healthy.
Next let’s look at a couple of cannabis stock price indexes. Above is the Let’s Toke Business Marijuana Composite Index and below is the Licensed Producer Index. As we have highlighted, both indexes appear to be turning up. Again the move to an upward trend fits very well with the forecast we have been espousing here for several weeks. We expect these cannabis indexes will continue to rise and as they do, we anticipate they will outperform the major market indexes such as the Dow Jones and TSX Composite.
Followers will recall that I believe the Licensed Producers outperforming the Composite Index is bullish. For the present time, however, I believe the LPs will underperform. These are the companies that will bear the brunt of legalization problems. We know that in a general sense the suppliers are not able to meet their commitments to the provincial buying agencies. So taken as a group the growers are underperforming their own expectations. I am also concerned by something in the Hindenburg report that quoted an former employee who said Aphria’s main Ontario grow facility was plagued with bugs. I have heard whispers that other Ontario growers are having problems as well. This is nagging at the back of my mind.
We’ll take a quick look at two other indexes: momentum and the Low-Priced Composite. The more important Momentum Index is performing exactly as expected while the Low-Priced Index is definitely lagging. We are not too worried about the Low-Priced Index underperforming because it would be surprising to see this index strong at a low level turning point. Assuming we move ahead from here, I expect this index will play some catch-up.
These charts show the relative performance of the Canadian and U.S. Marijuana Index (CMI) published by MJIC. The chart above shows the U.S. Index has been outperforming the Canadian Index generally for all of 2018. The chart below shows the U.S. Index was underperforming the Canadian Index from early 2016 to early 2018 but since then have started to outperform. Given the potential for political breakthroughs now that the Democrats have taken control of the House, we think this outperformance by U.S. based operators will accelerate. The stocks on our list that fit nicely into this outlook are Sunniva (CSE: SNN) and our newest recommendation, 1933 Industries (CSE: TGIF). Of course I don’t want to overlook Khiron Life (TSXV: KHRN) that operates in Colombia. I have more to say about all three of these companies below.
Conclusion: For several weeks I have advised caution as tax loss selling would keep cannabis stock prices depressed. However, I expected a rally to begin after Christmas when tax loss selling abated. We are now in that period and the cannabis stocks have started to gain strength.
If you have been following me here, in the Cannabis Report Model Portfolio or Seeking Alpha and have been maintaining a cash position waiting for this opportunity, now is the time to act. For example, in The Cannabis Report Model Portfolio, I initiated a new position in 1933 Industries (CSE: TGIF). If you have room and the resources, you should do the same. See my comments below. In the same portfolio, Khiron Life Sciences (TSXV: KHRN) is the largest holding. If you don’t own it or don’t own enough of it, now is the time. See my comments with pictures below.
Sunniva (CSE: SNN) has long been a favourite of mine and although it has been a disappointing investment, for the past couple of weeks it has been a leading performer in the portfolio. If you have been as patient as I have, it appears the market is finally starting to give them long overdue recognition. Now seems to be the ideal time to average down your cost.