Ted Ohashi's Marijuana Stock Market Review & Outlook
The cannabis stocks continued to advance against the backdrop of a selloff in the major market indexes. The Let’s Toke Business Marijuana Composite gained 1.8% last week even as the S&P/TSX Composite Index shed 2.0% and the Dow Jones Industrials lost 2.4%. This demonstrates investing in cannabis can do more for a portfolio than simply improving long term rates of return. It also provides diversification which should have the effect of lowering portfolio volatility. As the chart shows, following the Constellation/Canopy transaction, the canopy sector ended the summer strongly.
As prices seem to have bottomed out and turned higher, so has momentum as illustrated by the Let’s Toke Business Momentum Index. This is a positive technical sign because trends need momentum if they are to continue. As long as momentum keeps pace with prices, we can expect the trend to continue. Given the recovery was triggered by the investment by a major non-cannabis company into the leading Canadian cannabis company, it would not have been surprising to see a narrow advance. We are heartened by the fact that the recovery has a healthy level of breadth.
The LTB Licensed Producer Composite Index continued to demonstrate leadership posting a gain of 2.0%. This strength in the cannabis industry leaders is another important factor in our thinking. The index has burst through any possible resistance at the 3700 level and is not approaching the important 4000 mark. The index passing through this level without much difficulty will give us confidence that the index will surpass the previous high of 4700. This seems all the more likely with full blown legalization just around the corner.
The Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp., continued its amazing rebound posting a gain of 5.3% on top of the 25.6% gain it produced the previous week. The 3Ci advertises itself as the Dow Jones of Canad’s cannabis stocks which means, like the Dow, is made up of a select list of larger companies. The number of components currently stands at 15 which means its results reflect the performance of a comparatively narrow list of companies. This suggests its greater volatility will probably continue.
The LTB Low-Priced Composite indicates the smaller, more speculative cannabis stocks don’t know if they’ve been invited to the party. Last week the index was virtually unchanged. As regular readers know, this is a pattern we prefer to see at this stage. It indicates “irrational exuberance” has not permeated the cannabis group yet. Of course, it’s a combination of a promise and a warning when we keep saying we will see that speculative fervour hit the group before the cycle is over. But that is still off in the future and until that happens we won’t be too worried.
Conclusion: Labour Day generally marks the end of summer on Bay Street and there is no reason to believe it won’t be the case this year. We anticipate a flurry of activity in early September and into October as we enter the last few laps on the race to legalization in Canada. We see every reason for optimism for cannabis investors as we move forward.