Ted Ohashi's Marijuana Stock Market Review & Outlook
The market response to the Canopy/Constellation deal announced last week has been far more positive than expected. The impact has been so significant that it has changed the technical picture from neutral to positive in eight trading sessions. Last week the Let’s Toke Business Marijuana Composite Index posted a gain of +6.7%. This was the largest weekly gain posted since December 29, 2017. Although we wish the reaction was a little more muted, we will take what we can get. We’re not prepared to call for an enduring rally just yet but things are certainly shaping up that way.
We are comforted that the LTB Marijuana Momentum Index joined in the parade. Gainers outpaced losers by over three to one and this has definitely moved the market momentum into the early stages of a recovery. This means that even though the news really only impacted the Licensed Producers and the larger ones at that, a broad list of stocks joined in the rally. As we move forward, we would like to see this pattern continue. Of course the market was ready for a rally given its lacklustre performance for most of the year. We might be looking at another fall bounce that runs into a yearend rally as was the case in 2017.
The LTB Licensed Producer Composite Index recorded a gain of 7.4% last week. This comes as no surprise because WEED/STZ Version 2 was really most impactful for the LPs but it provides market leadership from the highest quality companies which is positive. But we should all heed Linton’s words. He speculates there will only be two or three winner/survivors out of all of this and the rest will not experience “consolidation” but “disintegration.” We should keep in mind that, as Linton says, there are more companies than businesses.
The Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp., had an absolutely spectacular week posting an advance of 25.6%. Again this is not a major surprise because this index is focused on the most senior of Canadian cannabis group and it is not diluted by smaller companies. We should not forget that in 1920 there were around 2,000 automobile manufacturing companies and that number was reduced by a small amount of consolidation and a large dose of disintegration. Eventually, of course, this number was reduced to the “Big Three.” That’s a long way off for the cannabis companies but the principal is worth bearing in mind.
The rally didn’t have as much impact on the lower priced cannabis stocks as might be expected. The LTB Low-Priced Composite made a strong gain of +4.0% on the week but this lagged the other indexes by a wide margin. We still believe that before this cycle ends, the high risk, lower priced stocks will have their day. At this point it makes sense to wait for it. In the fourth quarter of 2017, this group rallied strongly along with the other cannabis stock sectors. From a portfolio perspective, however, these higher risk companies should make up a much smaller part of the portfolio.
Conclusion: although we’re not ready to throw caution to the wind just yet, the outlook for the cannabis sector is clearly much better today than it was two weeks ago. The market is in a good position to receive and react to good news as it has been declining pretty much all year and prices are at a relatively low level. In a nutshell, we like what we’re seeing but we think it is prudent to keep some powder dry.