Ted Ohashi's Marijuana Stock Market Review & Outlook
The positive trend in the Dow Jones Industrial Average and the Toronto Stock Exchange/Standard & Poor’s Composite Index continues as expected. Both the Dow (+3.1%) and the TSX (+1.3%) posted solid gains last week and outpaced the cannabis stocks as measured by the LTB Composite. This appears to be a continuation of the best January stock market in twenty years in the U.S. So the well-established pattern of the U.S. stock markets always rising in post-midterm election years (every one since 1940) seems to be bearing out this year. Given the way President Trump seems to be losing points with voters, his only chance for re-election in 2020 might be the economy. But whether it is or not, stimulating the economy tends to be the priority of presidents at this point in their election cycle. Prime Minister Justin Trudeau seems to be having as many extraneous problems as Mr. Trump but doesn’t have the economy as a potential bail out.
As I said last week, I am more comfortable with the cannabis stocks advancing more slowly. In the past couple of years we have seen the cannabis stocks rocket up usually following Constellation Brands (NYSE: STZ) investing in Canopy Growth (NYSE: CGC) (TSX: WEED). But we have seen the other side of the mountain as prices quickly peaked and headed lower. I prefer the current market action that is likely to be a much slower but extended advance.
The LP Index had a fractional decline on the week. Both Aurora Cannabis (TSX: ACB) and Weed reported financial results. Investors should focus on the top line more than the bottom line at this stage. In both cases, top line revenue reflected the demand for recreational cannabis since Canadian legalization in October 2018. Bottom line figures, especially for Canopy were distorted to the downside due to non-operational factors.
Both the U.S. and Canadian cannabis groups recovered last week with the Canadian stocks rebounding a little more as measured by the Marijuana Indexes owned and managed by MJIC, Inc. As a result, the U.S. side underperformed the Canadian sector but its general trend of outperformance remains intact as the chart to the right indicates. There is a lot of pro-cannabis legislation percolating in the halls of power in Washington, D.C. and we could see a breakthrough come to the fore at any time. That is why we continue to favour the non-Canadian based operators and we favour companies such as Khiron Life Sciences (TSXV: KHRN) operating in Colombia, 1933 Industries (CSE: TGIF) which announced expanding sales to 46 states last week and Sunniva (CSE: SNN) that is staking out a claim as a leading operator in California.
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