Ted Ohashi's Marijuana Stock Market Review & Outlook
Recession fears combined with trade war worries as the markets bounced up and down in a turbulent week. On a daily basis the Dow ranged from up 383 to down 801 points with an average daily points change of almost 400 points. For the week, the Dow was down 1.5%. In the economic conversation you probably heard the term “yield curve inversion.” This means short term interest rates are lower than long term interest rates. With an inverted yield curve, a borrower has to pay a higher annual interest rate to borrow money for two years than for thirty years. Inverted yield curves don’t happen very often but when they do, the economy generally goes into a recession.
The Let’s Toke Business Marijuana Composite extended its record setting downturn to 16 weeks by posting a loss of 2.4% on the week. By our measurements, this prolongs the longest bear market in the brief history of cannabis stock trading. Last week saw several cannabis companies report earnings and in general the results weren’t terrible. But it was Canopy Growth’s (TSX: WEED) (NYSE: CGC) earnings that rattled the markets although Tilray (TSX: TLRY) (NASDAQ: TLRY) and The Green Organic Dutchman (TSX: TGOD) were in the same boat. WEED reported a quarter to quarter decline in revenue and a quarterly loss of $1.2 billion with a “b.” I suspect on top of everything else, Constellation Brands (NYSE: STZ) has decided to write down or write off everything including the kitchen sink at Canopy this quarter. I reported recently that the market was overreacting to the “profit” reported by Aphria (TSX: APHA) (NYSE: APHA) and now I have to tell you that the market is overreacting to the negative “profit” report by Canopy. APHA’s “profit” was boosted by the accounting treatment of financial assets and WEED’s “loss” was created by a similar accounting effect. These are bearish events in a bear market.
Although the Canopy earnings report was stunningly bad, its stock price loss on the week was only around one-third as bad as the additional drop in my favourite headline maker CannTrust (TSX: TRST) (NYSE: CTST). I said the 40%+ price increase in TRST didn’t pass my smell test. It turns out, the buying came from an unidentified Exchange Traded Fund (ETF) that was rebalancing its portfolio. If this is correct, I wouldn’t want to be identified either. That has to be the worst public example of institutional trading in history. Of course, it didn’t help that Health Canada shortly sent TRST another letter that said it has compliance issues at its facility in Vaughn, Ontario. Earlier HC had informed TRST that its facility in Pelham, Ontario was non-compliant for growing cannabis illegally. This sent TRST crashing again recording a drop of 34.7% on the week. If you are confused by the arithmetic, here’s a brain tester: if you own a stock at $1.00 per share and it falls 50% only to immediately rebound 50%, you’re still down 25%!
Despite the events impacting Canopy and CannTrust and others, don’t overlook the fundamentals – the U.S. based operators continue to outperform the Canadian based operators. These two charts show the Marijuana Indexes owned and managed by MJIC show this quite clearly. This is a trend I have been referencing for several months and I expect the trend will continue. So get those portfolios rebalanced into U.S. based operating companies. The first chart shows prices are still declining which means so far, your wins come in the form of portfolios that haven’t declined as much. But I think in the relatively near future, the benefits will be portfolios that are increasing more quickly in value. You don’t want to miss out.
This chart shows that the LTB Marijuana Composite Index has now declined for sixteen consecutive weeks. Every successive weekly decline extends the record of futility in the Canadian cannabis stocks. In any case, I have said we are in a cannabis stock bear market and the declines continues. The good news is the market are falling sharply and it looks like a “U” bottom is less likely and a “V” bottom is more likely. Better to get it over with as soon as possible.
Conclusion: As described below, the change this week is I have put Sunniva (CSE: SNN) (OTCQB: SNNVF) in the penalty box pending resolution of the problems announced this week. Otherwise, the others on my current list look more attractive the lower their prices go in this bear market with the U.S. and internally based operators continuing to outperform. In these terms: 1933 Industries (CSE: TGIF) (OTCQB: TGIFF) is an American based operator with outstanding growth prospects, is in the process of becoming totally Americanized, Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF) is totally international with its cosmeceutical products being introduced into the U.S., Lexaria’s (CSE: LXX) (OTCQX: LXRP) DehydraTECH™ bioavailability technology is not bound by borders and Cannabis Growth Opportunity Corp. (CSE: CGOC) that provides investors the opportunity to buy cannabis equities at a 40% to 50% discount to Net Asset Value.