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.
One aspect of our forecast for the cannabis group was a recovery in the major markets. As these charts show this is happening. Above, the Dow
Jones Industrials that appear to be reversing direction for the better. To the right is the TSX Composite Index that measures the performance of the major Canadian market which also appears to be turning as expected. If the major markets are behaving positively, it makes is easier for the cannabis group to rally. One thing you may note is there is a fairly strong sentiment against a market advance at this time. You may have heard it said that the market must climb a wall of worry. This means the markets are low because investors are worried about prospects. That is why the market is low. The market will move higher as more and more investors become optimistic. We expect to see this develop over the next six to twelve months.
Next let’s examine two cannabis indexes. Above is the Let’s Toke
Business Marijuana Composite. As the chart indicates these stocks appear to be rising right on cue. Importantly the chart to the right also is bottoming out. This chart shows the LTB Marijuana Composite compared to the TSX Composite Index. If this chart rises to the right as it seems to be starting to do, it means the cannabis stocks are outperforming the industrials. For portfolio investors this is exactly when you want to own cannabis stocks in a portfolio as it should increase your rate of return.
Above is the LTB Licensed Producer Index and to the right is the Low-Priced Stock Index. These are the two extremes in the cannabis group as the LPs are the largest companies and the low priced stocks generally represent the smaller companies. As the charts show, both of these groups also appear to be reversing long term downtrends. Given my outlook is for strength in the cannabis stocks.
We expect the shares of U.S. based cannabis stocks to outperform the Canadian focused company stocks. The chart above shows the strong recovery that has taken place in this group in recent weeks. But as the relative performance chart to the right shows, the Canadian based company shares did even better last week. Fortunately, the difference was not enough to break the trend that still has the U.S. based companies outperforming.
This chart serves to remind investors when a trend is getting a little long in the tooth and at five weeks, this rally is now a little bit longer than normal. As the chart shows, however, rallies of six to seven weeks are not unusual so this one could easily run another week or two before there is a pause to consolidate price gains. I’m not concerned about this one and, for example, I intend to add to a couple of portfolio positions this week in The Cannabis Report Model Portfolio.
I continue to believe the following companies are the ones to overweight in portfolios. But as I have said in the past at times like this, don’t over wait, overweight. 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 am adding Lexaria Bioscience (CSE: LXX) to the list as the stock perked up last week and I like the market action that I saw.
Conclusion: Now that the downward pressure from tax loss selling has abated, the cannabis group is beginning to advance as I expected. I think this is a good time for a parable in the belief that if we don’t learn from history, we will relive the same mistakes over and over again in the future. Here is the lesson. In 2017, I recommended Lexaria at around $.20 per share. As the stock started to move higher, I continued to urge people to buy. After the stock went over the $1.50 level I got an email from a reader who asked if it was too late to buy Lexaria! This was after it had already gone up seven to eightfold in original recommendation price. Although the price eventually went to almost $3 per share, I remember thinking to myself that it was a learning opportunity. So here is the lesson: if you’re going to buy 1933 Industries or Khiron Life Sciences or Lexaria Bioscience or Sunniva, BUY THEM NOW. As internationally renowned investor Warren Buffett says, “Be greedy when others are fearful….” This is a time to be greedy in the cannabis group.
It’s what I’ve been doing in The Cannabis Report Model Portfolio. In recent weeks I have taken a new position in 1933 Industries and added to existing positions in Khiron, Lexaria and Sunniva. These are four companies along with Canopy Growth and Organigram that I think will generate outstanding returns for shareholders. At the same time, I sold my holding in Ascent Industries at a profit because I didn’t like what I was seeing, I sold Radient Technologies to increase the cash position in the portfolio and sold The Green Organic Dutchman to crystallize a tax loss. This has been a very active time but you have to respond to the markets messages. I will likely be busy for a while yet.