Ted Ohashi's Marijuana Stock Market Review & Outlook
The Let’s Toke Business Marijuana Composite Index posted a small loss of 0.8% last week. This came in the face of substantial declines in the major indexes. At the same time, the Dow Jones Industrials gave up 6.0% while the Toronto Stock Exchange lost 7.1%. Clearly investors are having a hard time coming to grips with what will happen post-legalization. We take our lead from Bruce Linton, CEO of Canopy Growth. We think the future of cannabis investing lies in international markets. Canadian companies will still enjoy a major advantage based on experience and finances. We can’t wait for October 17, 2018 to be behind us so investors will focus not on the past or present but on the future.
The LTB Marijuana Stock Momentum Index is reflecting the moves in the price index generally speaking. However, it is underperforming prices. As a rule, this forebodes a subdued short term response to the passage of legalization. Whenever the trend in prices and momentum diverge, we follow momentum. What is happening at present is nothing to be overly concerned about. The divergence is still quite short and small. But if it persists for another four to six weeks, it will be a cause for concern. In the meantime, October 17, 2018 will be a historic day in Canada. Let’s enjoy it.
As the LTB Licensed Producer Composite Index shows, this group has been in better shape during the rebound. It has moved higher in the recovery and has corrected less in the reversal. We doubt this results from investors thinking legalization will lead to an enormous increase in sales. It will be it will take time. Rather we believe the market is now looking beyond Canada in evaluating the LP group. The rest of the world is clearly much larger than Canada and there are more grass roots opportunities there than in Canada. We look for the LPs to continue to lead the way.
The Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp. demonstrated its greater volatility again last week. Fuelled by a 7.5% gain on the final trading day of the week, the 3Ci was able to record a gain of 5.0% on the week. Even so, this index has been biding its time for the past several weeks trending essentially flat since mid-September. We continue to use the index to give us a quick snapshot of intraday trading in the cannabis stocks.
The most troubling market action is in the LTB Low-Priced Composite Index which recorded a decline 2.4% last week. As the chart shows, the index is now threatening to drop below its previous low of 147.78 in late October of last year before the market rallied strongly to close out the year. If the index should fall below the one year low, the decline could continue much further. It is worth noting, however, that the performance in recent months has not been that serious. Since early April the index has lost less than 10% which isn’t much in such a volatile group.
Conclusion: as we approach legalization day in Canada, investors seem less excited than tokers. Even recreational cannabis smokers will not have that much to celebrate. It seems clear that retail bricks and mortar dispensaries will be far and few between. We continue to believe this market needs another shot in the arm in the form of another “Constellation/Canopy”-type event or a breakthrough in the U.S.