Ted Ohashi's Marijuana Stock Market Review & Outlook
Perhaps you’ve noticed the factors that drive the markets don’t change much from week to week. Last week the major markets were declining because U.S. President Trump and China’s President Xi were at each other’s throats over tariffs and trade. This week the markets are up because Trump and Xi made some vague comments to suggest the trade war would de-escalate. All of this led to volatility. In the U.S., the S&P 500 closed up or down in half of the trading sessions in August including the biggest drop of the year to date. Canada enjoyed the added boost of positive economic data for the second quarter.
For cannabis stock investors, the downtrend continued as The Let’s Toke Business Marijuana Composite recorded its 18th consecutive down week. The LTB Marijuana Composite another 1.7% while the more volatile Marijuana Index Canadian Index lost 2.2%. CannTrust (TSX: TRST) (NYSE: CTST) keeps coming up with ways to keep a depressed market down. Under the Management Cease Trade Order, TRST is required to publish a Default Status Report every two weeks. This report said nothing has happened in the past two weeks, we intend to comply with the regulatory requirements we are subject to and there is nothing we are about to default on to the best of our knowledge. In other words, no relief in sight. TRST lost another 7.3% last week and continued to drag the rest of the cannabis market lower.
The Let’s Toke Business Licensed Producer Composite Index dropped 1.0% last week meaning it performed better than average in a down market. But I find the market action in the low priced intriguing. The top chart is the longer term chart of these two. Along with the rest of the market, the low-priced stocks have been shedding value. But the chart above right shows that in a comparative sense, the low-priced stocks have been outperforming for several weeks. We know from the price chart, this is not because this group has been going up in price. It is because they have stopped falling in price as fast as the rest of the market. This makes some sense. If you buy a stock at $20.00 and it drops to $2.00 for a loss of 90%, you will likely sell and carry on. But if you buy a stock at $1.00 and it drops to $0.10 per share, also a loss of 90%, you are likely to leave it there. At some price, it’s not worth selling. This may be what’s happening to the low-priced group. To me this might be an opportunity. After all a stock at $.10 per share can double or triple before you even notice it.
The Marijuana Indexes owned by MJIC show the U.S. based companies continue to outperform their Canadian counterparts in a down market. This week I thought we’d look at it from the other side by examining the charts for the Canadian indexes. The top chart of these two shows the Canadian group has been declining in price along with the other cannabis stocks quite consistently since early 2018. As a result, this is the group that is underperforming. I was reminded of this reading an article in Barron’s by Bill Alpert. The fundamentals, as pointed by GMP Securities’ analyst Robert Fagan, also favour the U.S. operators by a wide margin. Canadian companies are often trading at up to ten times sales while American operators can be found trading at closer to one times sales. In our group, 1933 Industries (CSE: TGIF) is an excellent example. As I reported recently, TGIF is trading at about one times sales expected in the next twelve months and the stock has slipped further in the cannabis bear market. That is why at $.36 per share, I think this is an extremely attractive stock.
This chart illustrates just how extreme this cannabis bear market has become. There have now been 18 consecutive weeks that the Let’s Toke Business Marijuana Composite Index has declined. As I mentioned above, there has not been a weekly gain in the index since April 26, 2019. Since that time, this index is down 24.7%. This somewhat understates the decline as the LTB Index is one of the better performing cannabis stock market measures. For example, the Canadian MJIC Index is down 45.1%.
A bear market for conventional stocks is normally defined by a drop of 20% or more from high to low. As cannabis stocks are more volatile, the parameters should be larger. I would say a decline from high to low should be double the norm or -40%. The LTB Index from peak to recent low is -50.1% while the MJIC Index is -62.9%. By either measure, this would qualify as a bear market using this standard.
Conclusion: Although I still have Sunniva (CSE: SNN) (OTCQB: SNNVF) in the penalty box recent developments have given me for more confidence for both the short and long term prospects. I had an opportunity to have a one-on-one conference call with Dr. Anthony Holler, Chairman and Chief Executive Officer of Sunniva, Kevin Wilkerson, the recently appointed President of Sunniva Inc. and President and CEO of Sun CA Holdings the main U.S. subsidiary, David Lyle, Chief Financial Officer of Sunniva Inc. and Rob Knowles, Vice President of Corporate Development. It seems there was a glitch in the system and questions, at least my request to ask questions did not register on the system. Luckily for me, someone noticed and right after the formal call, I was invited to join the group to ask my questions in a more informal setting. In my opinion, if you only participated in the conference call that was primarily a scripted presentation, you didn’t get a complete picture of what is going on at Sunniva. After both calls, I am convinced the addition of Wilkerson and Lyle to Holler will make a significant improvement to the management at Sunniva. To listen to an audio replay of the formal presentation, call 604-674-8052 locally or otherwise 1-855-669-9659. Use code 3557. I have summarized both calls from my perspective in more detail below.
This week I see some reason for a little optimism. The Canadian political polls suggest the incumbent Liberal could win the next election. Three months ago, this was almost unimaginable. Also the cannabis stocks have fallen for 18 consecutive weeks. The financial markets often behave as if going lower means it will continue to go lower. But for over a century, the financial markets have established that isn’t correct. The markets go up and down and they go up a lot more than they go down. So big drops in prices are opportunities to buy and that is what you should be doing. As the indexes continue to show, the U.S. and internationally based operators continue to outperform. With that in mind, these are the ones to watch: 1933 Industries (CSE: TGIF) (OTCQB: TGIFF) is an American based operator with outstanding growth prospects, Cannabis Growth Opportunity Corp. (CSE: CGOC) provides investors the opportunity to buy cannabis equities at a 40% to 50% discount to Net Asset Value, Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF) is totally international with its cosmeceutical products being introduced into the U.S. and Lexaria’s (CSE: LXX) (OTCQX: LXRP) DehydraTECH™ bioavailability technology is not bound by borders.