Ted Ohashi's Marijuana Stock Market Review & Outlook
The major U.S. and Canadian markets rallied again last week as Presidents Trump and Xi continued to talk trade issues on a more hopeful note that pushed the markets higher. Last week, China’s President Xi said he would exempt some U.S. goods from tariffs and President Trump responded by delaying the increase in some tariffs due to take effect in October. As this might overlap with the scheduled meeting of the leaders of the two largest countries in the world, it generated optimism regarding a trade agreement. The major U.S. market indexes rose for a third consecutive week and the Toronto Stock Exchange broke through to an all-time high.
While a one week advance in the Let’s Toke Business Marijuana Composite broke a string of `18 consecutive declining weeks in the cannabis stocks, the LTB Index reverted to the downside with a small loss last week. As some investors feared, CannTrust (TSX: TRST) (NYSE: CTST), confirmed it is being dropped from the S&P/TSX Index effective September 23, 2019. I explained in an earlier report this means TRST will be dropped from the index funds that replicate the performance of the Toronto Stock Exchange Index, if it hasn’t already. In any case, as someone who follows the cannabis stocks on a daily basis, I am seeing some positive signs. The one I am really watching for is a key sign of the market low and that is “…a market that ignores bad news….” So, for example, if TRST should resist going down or even rises a bit on this news, I will look on that as a positive sign.
The Let’s Toke Business Licensed Producer Composite Index dropped a rather significant 2.5% last week. Investors appear to be focussed on sales and earnings in this group recently and they are finding stock prices are still high relative to the fundamentals. That is one reason I focus on companies like 1933 Industries (CSE: TGIF) (OTCQX: TGIFF) that I estimate is trading at around one times sales next twelve months sales. TGIF is a company with a sensible business plan, the people to manage it and a record of positive results.
As I said last week, the Canadian based companies could produce a couple of weeks of better performance but it is not a time to abandon our primary thesis – the companies with operations based in Canada might outperform for a few weeks but I think the U.S. operators will prevail. The Marijuana Indexes owned by MJIC show the Canadian based companies posted a decline of 3.0% last week which was better than the 4.6% loss recorded by the American Marijuana Index. The North American Index dropped 4.2% last week. In the U.S. there was some disappointment that changes to banking services in California were delayed until at least early 2020 but pleased by the announcement that the House will have a full vote on the SAFE Banking Act before the end of September. In Canada, there was a bit of further good news for cannabis investors on the political front as a Mainstreet Research poll for iPolitics showed the Liberals increased three points to 37.5% among decided and leaning voters while the Conservatives stayed still at 34%. As a sidebar on this poll, the NDP fell to fourth place (8.4%) behind the Greens (10.8%). According to Mainstreet, these results point to a Liberal majority government if the election were held today. For those less familiar with Canadian politics, the official campaign only started on Wednesday last week when the Prime Minister formally met with the Governor General and requested that the government be dissolved.
Conclusion: with the cannabis stocks low and the political winds apparently shifting to a more favourable direction, there is some reason for optimism for the first time in many months. As a result, I am stepping up my efforts to uncover another company or two to add to my list. In the meantime, the stocks on my current list are still very attractive and worth your consideration. These are: 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 50% discount to Net Asset Value.