Ted Ohashi's Marijuana Stock Market Review & Outlook
The major U.S. and Canadian markets demonstrated how different markets respond differently to the same news. The prime motivator of the week was the alleged attack by Iran on Saudi Arabia’s largest oil refinery. The attack on the Saudis disrupted about 6% of the world’s oil production, the largest in history, and oil prices rose 15% before settling back to up 7% by the end of the week. Rising oil prices were seen as positive for Canadian stocks and the TSX/S&P Index that broke through to record levels last week went even higher. Stock Exchange broke through to an all-time high. But higher oil was seen as a bit of a dampener on the U.S. with an economy that is struggling with higher tariffs.
The advance in the Let’s Toke Business Marijuana Composite was short as the index dropped for the second week in a row falling 3.7% last week. Momentum kept pace with prices on the downside. The major culprit was CannTrust (TSX: TRST) (NYSE: CTST) that had its licenses partially suspended by Health Canada. It is looking more and more as if the regulator is setting TRST up for an asset sale as we explain in more detail below. We conclude we have still not heard the end of the bad news for TRST.
At the same time as if this wasn’t enough, the Ontario Securities Commission (OSC) disclosed it is dealing with the first securities fraud case in the cannabis group as the notorious Ben Ward and his well-known cohorts are alleged to have siphoned off investor money from Cannada Cannabis Corp. (CCC). Until his sudden resignation in August, Ward was the CEO of Wayland Group that has its own checkered history. I can tell you by the time the OSC wraps its tentacles around you, there is a very good chance you’re done like dinner. I don’t think this is going to end well for Ward, CCC or sad to say, the shareholders who lost money. And because questions have been asked about Ward going back to Maricann days, there may be more to the story we haven’t heard. Yet.
The Let’s Toke Business Licensed Producer Composite Index dropped another 4.9% last week. We mentioned the suspension of CannTrust’s licenses that weighed most heavily on this group. In addition, the LPs are the companies that are being measured by revenues and earnings and investors are so far disappointed by the results. In an earlier report, I pointed out that the claim that Aurora Cannabis being the first large LP to reach profitability was “false news.” An excellent article by The Deep Dive headed “Supreme Prints Q4 Revenue of $19 Million, Adjusts EBITDA to Make It Look Like They’re Making Money.” You can read the full article (here) I have been calling cannabis companies to task going back to Tweed and Mettrum caught shipping cannabis illegally from Kelowna, B.C. to some of the claims made about Aphria by short sellers Quintessential and Hindenburg to Ascent Industries, CannTrust Group and now CCC and Ben Ward. Each time a regulator uses the velvet glove approach in dealing with transgressions, the more investor confidence is eroded. We’re at the point where investors are abandoning the sector because the cannabis group is taking on a “wild west” appearance.
As I have been saying for the past couple of weeks, the Canadian based companies could produce better performance. But this does not mean we should abandon our principal thesis – companies with operations based in the U.S. an internationally will prevail. The Marijuana Indexes owned by MJIC show the Canadian based companies posted a decline last week but outperformed the American Marijuana Index. This can be seen in the two charts above. The Canadian election campaign is underway and we are proving that our politicians can be just as ridiculous as the American scene. Somebody produced a picture of Prime Minister Justin Trudeau almost twenty years ago at an “Arabian Nights” themed costume party, dressed as Aladdin – a very popular Disney cartoon character at the time with his face blackened - as was the Disney character. Although others on the campaign reacted as if this was a capital crime, I don’t see anything wrong with it. What I find totally inane is the Prime Minister’s profuse apology. If elections swing on issues as important as this, I suppose we deserve the politicians we elect.
Conclusion: the cannabis stocks remain under pressure and the ongoing and growing list of scandals doesn’t help. But this is exactly the environment in which bear markets turn into bull markets. Trying to pick the exact bottom is a mug’s game, so just keep adding to positions in the stocks on my list and be ready for some new names coming down the pike. 1933 Industries (CSE: TGIF) (OTCQB: TGIFF), Khiron Life Sciences (TSXV: KHRN) (OTCQB: KHRNF) and Lexaria (CSE: LXX) (OTCQX: LXRP) fit my positive U.S. and international outlook and Sunniva (CSE: SNN) (OTCQB: SNNVF) will be back in my good books when the Okanagan Falls sale closes. I did ask again last week and was told they are working on it. Cannabis Growth Opportunity Corp. (CSE: CGOC) does not neatly fit into this description, but especially in this market, buying value makes sense. CGOC reported a new Net Asset Value of $2.85 per share. At last week’s closing price of $1.34 per share, the shares are trading at a 53% discount to true value based on a portfolio of public and private cannabis companies.