Ted Ohashi's Marijuana Stock Market Review & Outlook
The world is unfolding as we thought it would, at least generally speaking. Here are the two indexes we follow that measure the stock markets generally. You will recall that moving ahead in 2019, I thought the major markets would be moving higher. They are. The Dow and TSX are both within 2% of all-time highs and other widely followed indexes are giving the same message. There is no shortage of things to worry about. The economy, interest rates, Brexit and the problems in Europe, trade problems with China, and so it goes. But as we have also said here in the recent past, negativity at this stage is a good thing. It suggests there is room for things to get better and for stock prices to move higher.
After a couple of weeks of modest declines, the LTB Marijuana Composite posted a gain of 1.1% last week. As the chart below left shows, after the sharp recovery posted after Christmas that we anticipated quite accurately, the price trend has clearly gone flat. In the absence of new information, I would be following through on my expectation that Canadian cannabis stock prices will soon head higher.
Unfortunately, we have new information. Prime Minister Trudeau and the Liberals are throwing away any chance they have for re-election in October. A Conservative government will slow down the pace of legalization as much as they can short of stopping it. So it doesn’t mean that I am looking for a sharp selloff in cannabis stock prices but I think we will see a significant underperformance in the stock prices of those companies operating primarily in Canada. This may have already started as you can see when I discuss Canadian cannabis stocks relative to their U.S. counterparts below.
Another change worth mentioning is investors are now paying attention to sales and income. You may recall a year ago the market was warning that cannabis stocks would be driven by sales and income. I thought it was too early but now sales and earnings are driving stock prices. A peek at Sunniva (CSE: SNN) this week shows how strongly their stock responded to a favourable earnings report. See more details below. I suspect this will mean a tougher road ahead for the Licensed Producer group. Meanwhile, keep an eye on the more junior cannabis players.
If you had any doubts about the U.S. group outperforming the Canadian cannabis stocks, take a look at last week. We are using the Marijuana Index group owned and managed by MJIC. Last week the MJIC Canadian group only managed a paltry gain of +0.7% while the U.S. subset posted a rise of +6.5%. An important factor last week, in my opinion, was the passage of the SAFE Banking Act out of committee. As I explain in more detail in “Marijuana Matters” below, this legislation will likely pass the House with ease. While it is anything but certain how the Senate will react, for the first time in at least five years, pro-cannabis bills in the U.S. are being considered, debated and possibly passed. As more and more investors wake up to the potential, the U.S. side is likely to dominate action in cannabis stocks moving ahead.
Conclusion: We are undergoing a basic shift in our outlook for Canadian cannabis stocks focused on domestic markets. Those who follow The Cannabis Report Model Portfolio will see an increase in cash and a decrease in exposure to the Canadian cannabis operating arena. From our list, we continue focused on 1933 Industries (CSE: TGIF) (OTCQB: TGIFF), Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF), Lexaria (CSE: LXX) (OTCQX: LXRP) and Sunniva (CSE: SNN) (OTCQB: SNNVF).