Will U.S. or Canadian cannabis stocks be more profitable in 2019?
As all cannabis investors look forward to a happier and more prosperous 2019, there is one major question on many people’s minds – will it be more profitable to own the U.S. or Canadian based cannabis based stocks?
I’ll begin by looking at the big picture.
For this analysis, I will use The Marijuana Indexes operated by MJIC that is responsible for the management of the components. The index companies must have a business strategy focused on the legal marijuana industry including companies that directly handle marijuana as well as ancillary companies that support marijuana-touching companies and consumers. Marijuana includes all forms and applications of the marijuana or cannabis plant, including hemp and derivatives of the plant, but does not include synthetic cannabinoids. Constituents must have more than 50% of their operations focused on the marijuana industry.
Each index company must meet minimum trading requirements that equates to a minimum market capitalization of $80 million, daily trading volume of $2 million and share price of $1.00. Companies with at least $5 million of revenues over the prior year are exempt from the above trading requirements. All dollars in $USD.
The first index we will look at is the U.S. Marijuana Index from November 27, 2015 forward. The index has 16 component companies. A visual assessment tells us the U.S. cannabis stocks performed well during this period of time. Indeed they did provide high investment returns. The index as presented represents a Compound Annual Growth Rate (CAGR) of 42.4%. Although we did not examine each one, the U.S. Marijuana Index probably outperformed any major world country index at this time.
The next chart is the U.S. Marijuana Index for the previous twelve months. What the chart shows is the performance of the American cannabis stocks has been strong. In fact, the one-year return accelerated to 62.3%. Despite a correction over the past six weeks, the uptrend here and in the chart above, seems intact. Of course, the trend is at a critical point. If the sector continues to decline over the next few weeks, the advance could easily break down.
This is the Canadian Marijuana Index made up of 18 component companies. The first spike that peaked in early 2018 represents the rally pursuant to the news that Constellation Brands was making an investment in Canopy Growth. The second lower peak followed the report that Constellation was making a second investment in Canopy. The overall CAGR represented here is 76.2% per annum staring on November 7, 2018 to the present. This compares with the 42.4% CAGR on the U.S. index over the same period.
This is the one-year chart of the Canadian Marijuana Index. Clearly this chart depicts a Canadian cannabis stock group that has underperformed its American counterparts. In fact, the one year return on the Canadian Index is 16.0% compared with 62.3% on the U.S. Index for the same period. So this gives us a working diagram: the Canadian cannabis stocks have done better overall but in the past twelve months, the U.S. cannabis stocks have done better.
This chart shows these results in one graph by plotting the U.S. Cannabis Index relative to the Canadian. If the line rises to the right it means the U.S. cannabis stocks are outperforming the Canadian counterparts and if it is falling to the right, the U.S. stocks are underperforming. It shows that from early 2016 to early 2018, the American cannabis companies underperformed the Canadian cannabis companies on the stock market but since then, they have outperformed.
Relative trends tend to last for longer periods of time. Given that the period of U.S. based company shares outperforming Canadian based company shares is almost a year, I think this trend can continue for at least another year.
As we have said, the cannabis stocks are event driven. In the U.S. sector we had such an event last week when Altria invested US $1.8 billion into Canadian Licensed Producer Cronos Group. Unfortunately, this coincided with the Hindenburg hatchet-job on Licensed Producer Aphria last week. The result was, in a market dominated by pessimism, the significance of the Alrtia/Cronos deal was overshadowed by the Hindenburg/Aphria news.
Although relative performance does not depend on market direction, the Canada/U.S. cannabis stock outlook described above fits well with my general expectation for the market. Tax loss selling pressure for a couple of weeks followed by a market rebound into 2019.