Ted Ohashi's Marijuana Stock Market Review & Outlook
After closing out the worst month of May for stocks since 2010, the markets rebounded going into June. As has been the case during most of the Trump Administration, the President’s words drove the financial markets. Before that, however, it appears President Trump had a positive visit with the Queen and the Royal Family in Britain and a genely non-controversial visit in Europe commemorating D-Day. Upon his return, he was told Mexico had agreed to his demands for change related to stem the tide of migration into the U.S. through Mexico. As a consequence, additional tariffs that were to go into effect this week were suspended indefinitely. The market had been discounting another round in the trade war around the world and were relieved.
A few weeks ago, I said the market would tell us whether there will be a rally in the cannabis group before the October 21, 2019 election or not. The answer to that question will have an important impact on how to best invest in the Canadian based cannabis operators moving forward. So far, I have to report my interpretation of the clues being received are mostly negative. If we look at the Let’s Toke Business Marijuana Composite Index, it currently stands at 761.25 and if it drops below the December 21, 2018 low of 758.35, The market will once again be in long-term downtrend. It seems simplistic to say but a rising trend is a pattern of higher highs and higher lows. A declining trends is a pattern of lower highs and lower lows. Looking at the chart above, the pattern of lower lows will be established if the weeks ahead produce a new low.
Regular readers know I preach following momentum when it diverges from prices and this what has been happening. So if I had to guess, I would say a breakdown in the trend is nearly inevitable. If that happens, it simply reiterates the strategy I have been preaching since last fall. Buy the companies with operations outside of Canada and underweight or reduce exposure to companies operating primarily in Canada.
Both the LTB Licensed Producer Index and the LTB Low-Priced Composite recorded declines last week with the Licensed Producers outperforming and the Low-Priced group underperforming. Under conditions that reinforce a strategy that I have been espousing for many months, it is difficult to see the Licensed Producers extremely well. They have Canadian based operations and the arguing who has more or less seems a little like splitting the hairs from a dead horse. It is in other sectors that you will find the best cannabis stocks to own. That is where I am looking and you should be as well.
The charts above and below are the Marijuana Indexes owned and managed by MJIC. Below in the chart of companies with a substantial share of their cannabis business based in Canada while the chart below show the performance of those companies with their cannabis business concentrated in the U.S. In an absolute sense, the Canadian based operators have been declining while the U.S. based operators have been virtually flat. The charts below measure these trends in a relative fashion, that is, how is one index doing compared to the other? The first chart shows the companies with U.S. operations have been doing better that the companies with Canadian operations over the past year. The next chart gives you a longer term perspective showing the operators focused on the U.S. underperformed for 2016 and 2017 but have recovered generally since 2018. A reader astutely asked whether a sell-off or bear market in the Canadian group would drag down the other cannabis stocks at the same time. I explained that in my opinion that was not likely to happened any more than a decline in the Canadian bank stocks would drag down the U.S. bank stock group.
It occurred to me that readers might think the difference in performance is rather small. However small it may seem to be, the impact on your accumulated wealth can be enormous. The next chart illustrates the difference in the amount of retirement capital you will accumulate based on different annual rates of return you are able to earn.
The base case is a person who saves $300 per month starting at age 40 and retires and age 65. The rates of return illustrated range from 9% to 12% per annum and the amounts accumulated vary from just over $300,000 to nearly $500,000. You can argue about the amounts saved or the years to retirement or the rates of return but don’t. You risk missing the forest for the trees. What the chart illustrates and the basic message is small increases in the return on investment make a big difference in the amount of retirement capital you will have available.
Conclusion: Here are the individual securities in the cannabis group that I think will help you elevate your rate of return and subsequently your pool of capital at retirement. All of these companies share a common feature. All are positioned to benefit from the growth in the cannabis industry outside of Canada: 1933 Industries (CSE: TGIF) (OTCQB: TGIFF), Cannabis Growth Opportunity Corp. (CSE: CGOC), Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF), Lexaria (CSE: LXX) (OTCQX: LXRP) and Sunniva (CSE: SNN) (OTCQB: SNNVF).