Ted Ohashi's Marijuana Stock Market Review & Outlook
The Let’s Toke Business Marijuana Composite Index this week shows just how different the current upturn in stock prices is from the rally that closed out the year of 2017. That rally was a straight up affair which ended with investors believing the market would continue up until legalization that was expected at that time to be mid-2018. There followed an extended correction that was needed to eradicate the excess optimism. This time the market is moving in a more cautious, healthier approach. Also there is a general awareness that putting legalization into practice in Canada will experience the same kinds of problems that were and are being experienced in the western U.S. states such as California, Oregon and Washington. A year ago the market was betting on the hare. This year it is gambling on the tortoise. We prefer this year’s approach.
The LTB Marijuana Stock Momentum Index also reflects this more careful approach by investors. Last year it was up week after week with very few corrections. This year it has risen off the bottom but then has flattened out and is correcting. We view this development as a positive but what we need in the weeks ahead is evidence that prices are rising along with momentum. This is exactly what we look for. The upturn must come quite quickly otherwise trends will be breaking down. As we will see below, the Low Priced Index trend has confirmed the downtrend that began in January and has lasted almost all year.
As the LTB Licensed Producer Composite Index clearly shows the trend in the larger, Licensed Producer group is in much better shape and is far less likely to break its trend line higher. That should not be a surprise since it was Canopy Growth with the assistance of Constellation Brands that triggered the upturn just a little over a month ago. Furthermore it is the larger, LPs that have the war chests topped up as the scour the world for investment opportunities around the world. I will be speaking at the Canadian Cannabis Capital Markets Conference in Frankfurt, Germany later this month where I will have the opportunity to hear directly from the “big three” of Canadian cannabis: Canopy, Aurora and Aphria.
The Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp. is a more volatile index made up of larger cap companies. Last week the 3Ci declined 1.7% which was more than the LTB Composite and LTB LP Indexes. Clearly this index has also sent out a more cautionary signal in recent weeks. As we approach legalization, now less than two weeks away in Canada, the market is taking a more careful approach. This probably reflects the lessons learned last year as well as the fact that October 17 is shaping up to be a “soft” launch as both private and government dispensaries are going to be agonizingly slow to get underway.
The LTB Low-Priced Composite Index is diverging most from the market action of late 2017. As we can see, in October and November of 2017, this index about kept pace with the larger cap indexes whereas this year, it has not participated in the rally at all. In fact taking into account a 2.0% decline last week, the Low-Priced Composite has declined almost 5% since the market turned and this week, made a lower low. This is a strong indication that the trend in this index is still down from the high of late December last year. In a different way, the low priced stocks are also being timid.
Conclusion: the cannabis stocks are in an interesting position as we approach legalization day in Canada. Thanks to Canopy/Constellation again this year, the market is on a rebound but it is quite different from last year. Last year the market ran ahead with reckless abandon but this year the recovery has been far more cautious. We think the direction is still upward but clearly things are not as robust as they were last year.