Ted Ohashi's Marijuana Stock Market Review & Outlook
One of the factors that is an important part of our expectation for the cannabis stocks is an improving trend in the major markets. If the major markets are improving, we liken the cannabis stocks as swimming with the tide. It would be more difficult although not impossible for the cannabis group to advance if the major markets were declining. Here we show the Dow Jones Industrial Average as a measure of the U.S. markets and the TSX/S&P Composite as an indicator of the Canadian markets. As we can see both have reversed and are now headed upward. This promises much better returns in both sectors compared with a year ago. We pointed out that part of our expectation is based on the fact that the U.S. market has not declined in a post-midterm election year in the past twenty election cycles going back to 1940. The explanation is that Presidents begin to focus on an improving economy and rising stock markets as part of their re-election strategy. This would seem most likely to be more important to President Trump who appears to be in a tough spot almost everywhere except the economy and markets.
Last week I referred to a troubling development in which the price index was outperforming the momentum index. That seems to be resolving itself as the momentum on the Composite Index was over 2:1 and on the Licensed Producers it was 4:1. In the Low-Priced sector, momentum was much weaker but so were prices. I will continue to keep an eye on things as we move forward.
As these two charts clearly indicate, the Licensed Producer sector continues to perform very well while the Low-Priced group continues to lag. In this volatile market, investors are running to quality. As an indicator of investor psychology, this is a positive. When investors are so optimistic they will speculate on anything, it will be time to run for cover.
I think there is some confusion about what is meant by a U.S. cannabis company. Many advisors (myself included) have been expressing a preference for U.S. based cannabis companies compared with Canadian operators. Some investors have interpreted this to mean incorporated in the U.S. or primarily traded on a U.S. stock exchange. What it really means is a cannabis company that is doing a substantial part of its business in the U.S. For example, I use the Marijuana Indexes owned and managed by MJIC, Inc. To be eligible for inclusion in the U.S. Marijuana Index, a company must “…have more than 50% of their operations focused on the marijuana industry.” and “Constituents are assigned to…the U.S. Marijuana Index based on where their business operations are primarily focussed.”
A good example is my recent recommendation 1933 Industries (CSE: TGIF) that is a Canadian company, listed and traded primarily on the Canadian Stock Exchange but does some 98% of its business in the United States. TGIF has already benefitted from recent passage of the Farm Bill and I expect other regulatory changes in the U.S. that will advance its business further. TGIF produces, markets and sells cannabis infused products in Nevada and California and I recently visited them and viewed their expansion that is in the late stages of completion. As this new facility comes onstream, I expect TGIF to experience a dramatic increase in sales and EBITDA. So I view it as a very attractive U.S. based operator in the cannabis industry.
Conclusion: the cannabis stocks are performing pretty much according to my expectations and I look for the group to continue to advance in a positive way. Khiron Life (TSXV: KHRN) (OTCQB: KHRNF) that I mentioned here last week had an excellent week on the markets.