Ted Ohashi's Marijuana Stock Market Review & Outlook
On Wall Street, the Dow Jones Industrials, the Standard & Poor’s 500 and the NASDAQ Composite Index all reached record all-time highs at week’s end with the Dow topping 27,000 and the S&P above 3,000 for the first time. The TSX/S&P Composite once again got close but couldn’t quite make it to a record level. Historically, the stock markets hit new highs with some regularity as any long term stock chart will show. What is unusual is the conventional market indexes are hitting all-rime record highs while the cannabis stocks struggle. This is something to bear in mind when making comparisons between the two groups. In the markets, it is not a good idea to compare performance when one group is at record levels, especially if the other is at cycle lows.
The cannabis stocks moved sharply lower last week as the Let’s Toke Business Marijuana Composite Index dropped 3.7% last week. This was actually one of the more moderate index performances. For example, the MJ Index Canadian Index lost 10.6% last week and the North American Index fell 12.7%. Of course the news that CannTrust was growing cannabis illegally hit like a bombshell. Momentum continued to under-pace the price index with a 4:1 negative score. So although the price index has now made its second longest consecutive streak of weekly losses, the signal points to the downtrend continuing.
Although the Low-Priced Composite has been on a nearly perfect downtrend for the past twelve months, the Licensed Producer Index recorded an important change last week as the index closed below its Christmas 2018 low. This has the effect of turning its trend downward as well as it has made a lower low. Of course, the LPs were hammered following news that CannTrust (TSX: TRST) has been growing illegally for six months and some of the product has actually been exported to Denmark. This was a shocking revelation and the joke of the week was CannTrust has become Can’tTrust. I mean here’s a company that had the cannabis world by the tail and they frittered it away by growing illegally. Absolutely unforgiveable. This news cast a pall of doubt on all LPs resulting in a 4.8% drop in our LP Index. I have more to say about TRST below.
The charts above and below use the Marijuana Indexes owned and managed by MJIC. The chart above plots the share prices of cannabis companies that do the majority of their cannabis business in the United States. The chart below shows the relative performance of the U.S. operators compared to the Canadian operators. There is some confusion as some U.S. indexes have also been slumping and, on occasion, worse than their Canadian counterparts. But whatever readings various indexes for any given week, the overall picture remains that the shares of cannabis companies doing most of their business in the U.S. have been performing better. We are in the right sector and although prices of our stocks are declining as well, we will benefit shortly when the cannabis stock market turns. The one thing you can be sure of is it will turn.
The chart below shows that the LTB Marijuana Composite Index has now declined for eleven consecutive weeks. The streak is now within one week of the longest stretch of cannabis stock declines in the history of the LTB Marijuana Composite Index. Based on what we see, the only reason the streak might end is because it has already been going down for so long. In the market’s we call that a ‘dead cat bounce,’ as in ‘even a dead cat will bounce if you drop it from high enough.’ What it means is that even if the market does rally, it probably won’t last.
Conclusion: with the reversal of trend by the Licensed Producer group, it appears this is a bear market in cannabis stocks. I will have more to say about this. In the meantime, the worst mistake investors can make at this stage is to sell their holdings in a panic. You may find this hard to believe but it will be far better for your portfolio to buy at current levels than to sell. We have been undertaking a company by company review to ensure the stocks we have been talking about are fundamentally strong and this week we interview Chris Rebentisch, recently appointed Chief Executive Officer of 1933 Industries. What this interview reveals is a company selling at around one times sales over the next twelve months with additional high growth beyond. I think this is a good time to initiate a position or average down a holding in 1933 Industries (CSE: TGIF) (OTCQB: TGIFF) as well as Cannabis Growth Opportunity Corp. (CSE: CGOC), Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF), Lexaria (CSE: LXX) (OTCQX: LXRP) and Sunniva (CSE: SNN) (OTCQB: SNNVF).