Ted Ohashi's Marijuana Stock Market Review & Outlook
The major North American market indexes flirted with all-time record highs last week. The VIX index that uses options to measure the implied volatility in stock prices was in the news last week. The VIX measures “investor fear.” When the VIX is high, fear is high and that is supposed to augur well for rising stock prices. But when the VIX is low as it was last week, it means fear is low and stock prices might be ready to decline. Of course, the VIX is supposed to be a leading indicator which means it isn’t calling for an immediate drop in stock prices and like all indicators it is far from perfect. But it is followed by many investors large and small so it pays to keep it on the radar screen.
These two charts point out a strategy that we have mentioned several times in the past. When prices and momentum diverge, follow momentum. As the price chart has moved laterally while momentum has clearly trended down, we have to follow momentum and anticipate a correction moving forward. This is consistent with our concern about election polling and what lies ahead if the Liberals lose and the Conservatives win. I am obviously a little early because I don’t hear anyone else expressing the same concerns. But that’s okay. As long as we continue to overweight the portfolio in companies doing most of their business in the U.S. and other foreign markets, we will do well.
We mentioned last week that by mid-2018, investors were expecting the cannabis stocks to be driven by sales and income. I thought it was a little early but it seems to be happening now. So while I was bullish on the Licensed Producers at that time, I am far more cautious today. On the other hand, the smaller-cap stocks I was avoiding then, I am more attracted to now. In the market I see ahead, there is a spot in portfolios for what are called ‘special situations.’ A special situation is an investment that is attractive because of a unique set of circumstances. The profit potential in a special situation is derived from an improvement in valuation because of these distinct variables. I am looking at a couple of special situations at the present time.
Looking at the Marijuana Index group owned and managed by MJIC last week, stocks on both sides of the border were lower. In a down market, the Canadian side actually outperformed the U.S. based operators by a very small margin. In the U.S., government action is on the positive side. The SAFE Banking Act that had bipartisan support in Committee and is getting the same in the House.
Interestingly Steve Mnuchin, President Trump appointed Treasury Secretary, supported the move to increase banking for the cannabis industry. Another bill that is garnering support from both sides is the Strengthening the Tenth Amendment Through Entrusting States Act (the STATES Act). This act would not reschedule marijuana but works around the issue by exempting state legal activity from the Controlled Substances Act. The STATES Act received a positive comment from Trump appointed Attorney General William Barr who said it was preferable to individual states being in conflict with federal law as they are now.
Conclusion: Each passing week strengthens my resolve that cannabis portfolios should focus on operators outside of the Canadian domestic economy. As conditions for cannabis operators in Canada worsen, they improve in the U.S. So stay focused on my small list of preferred investments and watch for a couple of new names coming soon. For now, stick with the following names and add on weakness: 1933 Industries (CSE: TGIF) (OTCQB: TGIFF), Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF), Lexaria (CSE: LXX) (OTCQX: LXRP) and Sunniva (CSE: SNN) (OTCQB: SNNVF).