Ted Ohashi's Marijuana Stock Market Review & Outlook
The major U.S. indexes closed at record highs last week. The Standard & Poor’s 500 rose to 2,939.88 on Friday that was a record closing high while the NASDAQ Composite Index, that is a little more tech heavy, also closed at a record high. The Dow Jones was up on the week but still was around 1.5% below its record peak. The primary driver was a stronger than expected economy that rose 3.2% in the first quarter. In Canada, the S&PTSX Composite Index hit a record high earlier in the week pushed by rising oil prices and was weaker the rest of the week but still posted a gain. As I have been saying, it appears the major markets will continue to provide a boost to the cannabis stocks.
The cannabis markets as measured by the Let’s Toke Business Composite Index and momentum was about as flat as it can be. The price index was up 0.1% while the momentum index was dead flat. Indexes weighted more toward the larger companies performed better. As we anticipated, Canopy Growth (TSX: WEED) (NYSE: CGC) led the way after it announced a deal with Acreage Holdings (CSE: ACRG.U).
Investors seemed to like the combination of Canopy’s size and Acreage’s political muscle, the latter having former House Speaker John Boehner and former Massachusetts Governor and current Presidential candidate Bill Weld on its board together with former Prime Minister Brian Mulroney. But as I warned last week, the cannabis stock reaction to this development is likely to be far less than what happened following the WEED/Constellation Brands (NYSE: STZ) two announcements. For example, GMP Securities raised its target price for Canopy from $50 per share to $70 per share. That is a 40% increase. On the other hand, we think the response from the Canadian cannabis stocks in general will be less positive.
The Canopy/Acreage news gave the LP stocks a boost although I suspect it will be a short term event. If anything, it will provide a stimulus to the Multi-State Operators in the U.S. Meanwhile the Low-Priced Composite Index continues to drift lower. As regular readers know we use this index as a mandate for cannabis investor psychology and the reading seems accurate. We detect a fair amount of pessimism toward the cannabis group. But this is a contrary indicator and pessimism is positive for the outlook.
The Canadian Marijuana Index owned and managed by MJIC posted a strong gain last week boosted by Canopy Growth that was up 12.6% on the week. In combination with a mild decline in the U.S. Marijuana Index this produced a significant decline in the relative performance of the U.S. index. However, I see legislative pressures mounting in the U.S. in favour of cannabis including: the STATES Act (Strengthening the Tenth Amendment Through Entrusting States) that would limit federal action against those acting legally in according to individual state marijuana regulations, the SAFE (Secure and Fair Enforcement) Banking Act that would allow marijuana business to have access to normal banking services, and the Clean Slate Act is a bipartisan bill in the House that would seal federal criminal records for marijuana and other drug related non-violent offenses. I expect the U.S. cannabis group will continue to outperform their Canadian counterparts as they have for most of the previous twelve months.
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 I continue to prefer the following names and suggest investors 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).