U.S. Cannabis Stocks Approach A Buy Point As Canadian Marijuana Stocks Near A Sell Point. Get Ready!

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Includes: ACBFF, APHQF, EMHTF, MQTRF, OGRMF, SPRWF, THCBF, TWMJF
by: Ted Ohashi

Summary

As expected, the U.S. cannabis stocks dropped more than their Canadian counterparts. American stocks are edging closer to a buy point while the Canadian Licensed Producers approach a sell point.

Since the election, the U.S. weighted 420 Cannabis Investor Stock Index was down over 30% high to low and is down nearly 20% to last week's close.

Meanwhile, the Let's Toke Business Marijuana Composite is down only 8% high to low and only 3% to last week's close. But there were signs of "irrational exuberance" last week.

We interpret this as after their 'sell on history' event, U.S. marijuana stocks are getting closer to a buy point while the selling trigger still lies ahead in Canada.

I continue to like both U.S. and Canadian cannabis operators long term so this is a short-term trading opportunity. Americans should rebuild positions while Canadians take partial profits.

The gains in the Canadian marijuana Licensed Producer stocks have been nothing short of astonishing. My recent article '5 Charts Reveal the Current Danger in U.S. Cannabis Stocks' had barely been published when the Canadian LPs had another upside explosion. The message in that article was basically the U.S. stocks had their "sell on history" event on the evening of the election when eight out of nine states approved medical or recreational marijuana. But the report from the Canadian Task Force on Marijuana Legalization and Regulation HAD not yet been tabled, so the triggering event north of the border was still in the future. My comment was "The Canadian stocks appear to be awaiting the report of the task force which is what we expected. This implies the 'sell on history' event is still in the future north of the border."

With respect to Canadian stocks, I think the appropriate advice is opposite that for the U.S. marijuana stocks that have been falling in price and the buy point is getting closer. Holders of Canadian cannabis stocks should focus on getting ready to "sell on history," that is, when the task force report is presented. The list includes the companies in the Canadian Licensed Producer group: Aphria (OTCQB:APHQF), Aurora (OTCQX:ACBFF), Canopy Growth (OTCPK:TWMJF), Emerald Health (TBQBF), Mettrum (OTC:MQTRF), OrganiGram (OTCQB:OGRMF), PharmaCan Capital (OTCPK:PRMCF) (CSE - MJN), Supreme Pharma (OTCPK:SPRWF) and THC Bio (OTCQB:THCBF). If you check out the stock price charts of these companies you will find many of them seem to be defying gravity.

Within your portfolio there may be smaller cannabis companies that have recently moved lower along with the rest of the group. These may still be in a buying range and you don't need to wait for a correction to buy. For example, I think this is the case with some of the smaller companies I follow, for example Lexaria (OTCQB:LXRP). (see Lexaria Seeking Alpha Instablog)

Above is a daily plot of the 420 Cannabis Investor Stock Index that I use as a mandate for the performance of U.S. marijuana stocks. It shows the market reacted swiftly starting on the election day and continued lower for three days. From high to low, the index dropped 30.9% and is down 19.5% currently. I think the correction might have been a little sharper and swifter because of the unexpected result. Furthermore, I think investors realized a Trump administration might be less cannabis-friendly than the Obama government. Such concerns have subsequently proved justified with the nomination of Jeff Sessions as Attorney General. Sessions is well known for his comment "…good people don't smoke marijuana." So I think the U.S. cannabis stocks are close to being in a buying range but they aren't quite there yet.

The chart above is a summary of the Let's Toke Business Marijuana Composite Index that is our measure of the performance of the Canadian cannabis companies. The Canadian marijuana group surged on the Monday before the election and momentum carried prices higher the election day. There was a sell-off for two days after November 8th and then prices began to recover. The extent of the correction from the election day high was 7.8% and just 3.3% to date. Our view on this group is unchanged. We think Canadian marijuana stocks will continue to advance until the task force report is presented to the government. This is scheduled no later than the end of November. When the task force report is presented, we think it will be a "sell on history" event and a correction will follow. Also, should the report be delayed, I think the market will be disappointed, so be ready.

The post-election U.S. correction has been more severe than in Canada. This chart shows the 420 Index relative to the LTB Index since the election and the underperformance of the U.S. market is evident. This is no surprise as the "sell on history" event has happened in the U.S. I think there is still more downside in U.S. marijuana stocks but investors should be preparing to buy. If there is a sudden drop in the U.S. market or a particular stock you are watching, it could prove to be a great buying opportunity. The other change since the election is the Republican government-elect. Vice President-elect Mike Pence, Attorney General nominee Jeff Sessions and Secretary of State wannabe Rudy Giuliani are not friends of the cannabis movement. Also, California is Democratic and spoiled Trump's perfect evening by giving Clinton a face-saving popular vote win. I think it is unlikely California will attract sympathy or support from the Republicans. So the pieces are falling in place for a bit of a hassle between the federal and state governments. At the very least, I think the federal attitude toward cannabis will be less friendly than it has been.

In Canada, the Licensed Producer group as shown in this chart has moved higher ignoring elections and corrections. I think it's clear part of the market action is in response to the upcoming report from the Canadian Task Force on Marijuana Legalization and Regulation.(Task Force to Advise Government) That explains why the stocks I have spoken favorably about on Seeking Alpha are at the head of the pack: TWMJF, OGRMF, MQTRF and APHQF. I like them because they are the leading LPs and the market seems to be saying the LPs will be winners according to the upcoming task force report.

But let's not ignore the fact buying rushed into the Canadian LPs right after the election. Although President-elect Trump is not a supporter of the cannabis industry, he is not necessarily an enemy. But some of Trump's associates and appointees are definitely unfriendly. I suspect some American investors have decided Canada is a surer and safer place to make long-term investments in marijuana.

Also it may seem counterintuitive but the higher stock prices go, the more likely it is mutual funds and pension funds will start buying these stocks. Several investing institutions have restrictions based on minimum market capitalization and liquidity. I think when we look back on it, we will see November 2016 as the time when large, institutional investors started to seriously move into the cannabis stocks.

At many points along the way, there have been temptations to sell the Canadian LPs. But we are in the stage of the market when investors will be surprised at the market's positive response to good news and how easily investors shrug off bad news. I remember it clearly during the tech cycle. We would sit around in investment committee meetings wondering how much longer the tech bull market could last. It turned out not to be days or weeks or months. It was years.

Most investors have heard of Alan Greenspan's "irrational exuberance" description of the high tech stock market. Greenspan was the Chairman of the Federal Reserve Board at the time. It was his way of warning that the way investors were behaving suggested the tech market was too high. He said it in a speech on December 5, 1996, when the Dow Jones closed at 6,437.10. The Dow peaked on January 14, 2000, closing at 11,722.98. That was over three years later and more than 80% higher and a period of the highest profits from owning dot-com stocks.

There are signs of irrational exuberance in the marijuana stocks. For example, on Wednesday, November 16, 2016, TWMJF:

* Opened at $10.50, traded at $14.00 roughly an hour later, traded down to $7.25 by mid-afternoon before closing at $8.50.

* At its high, the TWMJF was up 33%. At its low, it was down 27%. It closed 15% lower.

* During the session it was halted five times due to single-stock circuit breakers or, what we used to call order imbalances.

* In the same session, APHQF, ACBFF, MQTRF, OGRMF and SPRWF were also subjected to trading halts.

* This means two-thirds of the publicly traded Licensed Producers were halted at some point during that trading day.

* Of the six LPs halted during the session, only ACBFF (+11.8%) and SPRWF (+1.0%) closed higher. The others: TWMJF (-15.2%), MQTRF (-11.8%), OGRMF (-11.0%) and APHQF (-8.4%) all closed down.

* Two-thirds of the LPs halted that day closed lower.

There was a lot going on behind the scenes.

But this is a relatively new above ground industry, less than three years old in Canada. So volatility is to be expected. And as I keep saying, one year and three years from now, I think these stocks will be higher.

There are lessons we must learn. For example, the marijuana industry in Canada is widely expected to reach $5 billion in the near future. This is about one-quarter the size of the liquor, wine and beer industry north of the border. But alcoholic beverages sold in Canada come from around the world: whiskey from Scotland, wine from France and beer from Germany, for example. But Canadian marijuana Licensed Producers are shielded from international competition.

After the election, some investors were bemoaning the fact Canadian growers won't have access to those new opportunities in Arkansas, California, Florida, Maine, Massachusetts, Montana, Nevada and North Dakota. That's true. But the sword has two edges. American growers won't be shipping into Canada either. In the meantime, there are Canadian companies such as Lexaria Bio that can benefit from the evolution of the marijuana industry anywhere in the world.

Given the powerful rally in the Licensed Producer group last week, I think the market believes the task force report will favor this group. This is an ideal set of events leading up to a "sell on history" opportunity in these stocks in Canada. If you've been following my comments, wait for the trading opportunity to take some short-term profits without abandoning the group. It should happen in late November or early December so we don't have long to wait now.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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