Ted Ohashi's Marijuana Stock Market Review & Outlook
Although the U.S. indexes lagged behind, the Toronto Stock Exchange Composite Index reach a new high on April 18, 2019. Ironically, the Canopy Growth offer to acquire Acreage Holdings spurred the rally to new highs. See Breaking & Corporate News below. The TSX Composite Index hit 16,587 besting the previous record set back on July 13, 2018. A major driver of stock prices is the low level of interest rates and the consensus that rate increases are not in the near term future. We often forget that stocks compete with bonds and money market investments for the investor dollar and, unless things have changed, many more dollars flow into bonds than stocks. With interest rates so low, money is diverted away from fixed income to equity. Also, history tells us that just because the popular indexes approach or reach new highs doesn’t mean the rally is over. Markets often continue to advance for many months and even years after setting a new high. I continue to believe the trend in stocks prices is up.
Last week I warned as I have many times in the past that when prices and momentum diverge, follow momentum. This meant prices are likely headed lower and that is what happened. The Canopy/Acreage announcement provoked a rally but that came on Thursday and it wasn’t enough to offset losses earlier in the week. Canopy announcements have triggered the last two major rally in Canadian cannabis stocks. The first was a major upturn when Constellation Brands made a major investment in Canopy and the second was a shorter and less spectacular rally when Constellation basically locked up control of Canopy Growth. Both of these announcements were positive for the rest of the cannabis industry. It foretold of other major cross-industry investors coming into the Canadian cannabis sector and they did. But this move by Canopy is not necessarily good news for other Licensed Producers. In a perverse way, it is bad news. It locks up top spot in the industry for Canopy Growth and more or less ensures the others will be left in the dust. So I think the October 21, 2019 federal election will continue to be the main driver of cannabis stocks in Canada and the way Prime Minister Trudeau and the Liberals are going, it is going to be a pile driver.
The Licensed Producer and Low-Priced Cannabis Stock groups performed as one might expect. The Canopy/Acreage news enabled the LP stocks to outperform on the downside meaning they decline in price less than the overall Marijuana Composite Index while the Low-Priced group did not perform as well. Last week in this spot, I talked about investing in ‘Special Situations.’ If you follow me in The Cannabis Report Model Portfolio, you will be introduced to a new stock in the portfolio that I think is qualifies as a super special situation. If you want to buy $1.00 in top quality cannabis stocks at 40% off, you won’t want to miss this one.
Another theme I have been harping on for some time is my expectation that the cannabis stocks with operations based in the U.S. or internationally will outperform their Canadian counterparts. I am using the indexes owned and managed by MJIC. Last week was a case in point. While MJIC Canadian Marijuana Index declined 3.3%, the U.S. Marijuana Index shown to the left, rose 2.2%. That is a startling example of outperformance as shown in the chart to the right. As this chart rises to the right, it means the U.S. sector is doing much better than the Canadian sector. The trend illustrates clearly what I am talking about.
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).