Big Cannabis Looking For Stabilization Following Positive Bill C-45 Vote

Benjamin A. Smith

Canadian cannabis stocks continue to drift lower following last week’s successful Bill C-45 third reading vote. Now that the dreaded (yet expected) sell-the-news event has taken place, we look at what cannabis investors can look forward to in the coming weeks as the retail market ramps up by summer’s end.

Looking at the Midas Letter Cannabis Composite Index, the last four sessions have been telling in a couple of ways. Weakness has dominated the market, but not to an extreme degree. Including today’s session through 12:32pm, the market has shed between ↓0.21-2.79% since Thursday’s opening bell, suggesting the selling is more of the steady, droning variety.

Meanwhile, the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) is now lower by ↓7.20% since reaching an intermediate term high of $19.84/share on Thursday morning. With that, the cushion room between the pre-legalization rally and technical level where cannabis stocks enter into technical correction territory draws closer.

With the steadily eroding price action entering Day 4 (though paring losses as I type), the key question is whether this leakage will turn into a torrent if/when key technical levels get breached. The further the market get shoved lower, the better the odds that demoralized investors start dumping positions, compounding downside weakness. With enough of it in place, the sell-side algos usually pounce and force capitulation to cleanse weak hands out of the market. Rinse, wash and repeat.

Investors will be hoping for a different outcome this time—and there’s reason to think it might happen.

Industry bellweather Canopy Growth Corp. has seemingly found its footing in recent sessions. The stock is higher by $0.59 to $38.93 (↑1.54%) today and appreciably above the $37.12 print it saw on June 8th. While its peers have not rebounded in kind, Canopy is providing an early tell that Aphria Inc. and Aurora Cannabis Inc. may not be far behind.

Aphria CEO Vic Neufeld on the company’s international plans

We also note how the small cap cannabis names have been holding steady. In most downturns (or upswings), the lower-tier names are usually the most sensitive to shifts in investor sentiment. The Midas Letter Smallcap Cannabis Composite Index is actually flat (↓0.18%) since the morning of June 7, actually outperforming its big cap brethren. If such a dystopian turn in investor segment has taken place, we’re not seeing in the places we’d most expect it.

Of course, we’ve already talked about how today’s period differs from that of the market selloff between April 2017 to July 2017 after the Trudeau’s government tabled Bill C-45. There’s more clarity on the revenue and production side, as well as international barriers being dismantled at an astonishing rate. Even the glacially slow-to-act World Health Organization has contemplated rescheduling cannabis use in the past few days. That would be the pinnacle of progress from an industry perspective.

Final Thoughts

What comes next is hard to decipher. In many ways, ripping off the bandaid would have been preferable to the slow burn investors have been experiencing over the past few sessions. Bill C-45’s outcome may have been a foregone conclusion, but it was still an important catalyst underpinning market cohesion over the past few months.

Now that Bil C-45 is history, the market awaits a fresh set of catalysts to move the needle forward once again. Until that time, look for valuations to play catch-up to the fundamentals and for give-and-take price action to trend upwards as the summer rolls along.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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