Ted Ohashi's Marijuana Stock Market Review & Outlook
The major markets rebounded last week with both the U.S. and Canadian leading market indexes close to new highs. The headlines have belonged to U.S. President Trump and China’s President Xi recently and have been the market drivers. The two leaders agreed to meet in Washington in October to discuss trade and this seems to have prompted the latest rally. Although many investors are still nervous about the markets, this is the fourth year of the Presidential Election Cycle which has historically been one of the best years for the U.S. markets. All Presidents, Donald Trump included, want the economy and markets to be strong heading into an election and, the theory has it, they work hard to make sure this happens.
The Let’s Toke Business Marijuana Composite finally produced an up-week after declining for 18 weeks in succession. The index did not produce a weekly advance in May, June, July or August. Last week’s advance was a rather tepid 0.4% but the MJIC Canadian Index posted a much stronger 8.7% recovery. As I explain later in this week’s letter, the political data that upset me in the first place, seem to making a remarkable turnaround. Two months ago, it seemed impossible for the Liberals to win re-election. This week the CBC Poll Tracker suggests they are favoured by a slim margin to form government after the October 21st election. Still the goat entrails can tell quite a different story after a few weeks so we’ve got to be alert. But given the drop in the indexes leading up to the election, a rally seems plausible.
The Let’s Toke Business Licensed Producer Composite Index clawed back 1.9% last week as the Low-Priced Index continued its seemingly straight line decline with a loss of 1.6%. It is worth noting that even CannTrust (TSX: TRST) (NYSE: CTST) was able to make a gain on the week despite further bad news. BNN Bloomberg reports that TRST was also using Black Market seeds to grow cannabis. (see a more detailed report below). What is most important to me about this news is that TRST was able to weather the storm and post a small gain. This suggests the stock may be suffering from seller’s exhaustion. I suspect TRST stock will bump along for several months underperforming the overall market. I still cannot see why you want to own the stock. Potential negative news includes illegal operations not yet reported or discovered, class action lawsuits and possible loss of Health Canada licenses.
The Marijuana Indexes owned by MJIC show the Canadian based companies bounced back last week and posted a much stronger gain that their American counterparts. The American Marijuana Index rebounded 4.3% but that was only half the recovery in the Canadian Marijuana Index that gained 8.7%. This does not mean we should abandon our strategy of favouring the U.S. based companies. As we pointed out recently, the American stocks offer much better value to investors. For the past year or so, the Canadian based operators have been winning a race to the bottom. As investors we’d rather not win that contest. But moving ahead, I think the U.S. operators will win the race toward the top and that is where we want to be. The first few weeks of the reversal might see the Canadian companies perform better as they are more depressed. But for the investment term, the non-Canadian based operators such as 1933 Industries (CSE: TGIF) (OTCQB: TGIFF), Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF), Lexaria’s (CSE: LXX) (OTCQX: LXRP) and let’s not forget Sunniva (CSE: SNN) (OTCQB: SNNVF). Although Cannabis Growth Opportunity Corp. (CSE: CGOC) does not neatly fit into this description, don’t forget it has an important weighting in U.S. and International cannabis companies and the entire portfolio is trading at a 45% discount to Net Asset Value.
I want to show this chart to illustrate how severe the decline in cannabis stock prices have been which implies we could see a very strong recovery from here. The 18 consecutive weeks of decline was about 50% longer than the previous longest decline and about three times as long as the “more typical” decline. If you want to follow the stock market maxim “buy low – sell high,” it is clear that cannabis prices are low right now. A conventional bear market is a high to low decline of 20%. The LTB Marijuana Index is down 50% from peak to trough while the MJIC Index is down 64%.
Conclusion: as I explain in more detail below, there is some reason for optimism on the horizon. In February 2019, I first flashed the red light about the election that is now less than two months away. At the time it appeared the incumbent, pro-cannabis Liberals would lose and the anti-cannabis Conservatives would win. This spelled bad news for the Canadian operators. But recently there has been a near-miraculous change in the political winds in Canada and the now the Liberals have a chance. If this happens, I think the American-based operators will continue to outperform but as prices rise. If outperforming a falling market is like kissing your sister (or brother), outperforming on the upside is like kissing the person of your dreams. 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. Finally, let’s not turn our backs on Sunniva (CSE: SNN) (OTCQB: SNNVF) that is close to getting back into the game as I explain in more detail below.