MACRO

For the trading week ended July 24, my proprietary Canadian Cannabis Company Index (MCCCI) decreased by 4.6% compared to last week when it increased by a nominal 1.3%. The index consists of 25 stocks, many of which are among the most widely held holdings of the 3 ETFs (MJ, CNBS, and THCX) that I consider to be a reliable barometer of the Canadian cannabis sector. The MCCCIs differentiated business model is both weighted and market capitalization based because I believe that this approach best represents the current landscape of the Canadian cannabis sector. As I’ve said here before, I believe there will be a pronounced reset in this sector, likely in Q3 or Q4 of this year. including but not limited to business failures, consolidation, and a significant downtrend in valuation. The survivors will be those companies that can operate profitably when the equilibrium price is established by the supply/demand dynamics. Based on the first 3 weeks of trading in Q3, I believe that we may be seeing more evidence of a “reversion to the mean” stability developing here. Now let’s look at this week’s good, bad, and ugly stocks.

MICRO THE GOOD

The following stock increased by more than 10% which is my metric for inclusion in this category: Zenabis Global Inc. (PINK: ZBISF) + 18.6% . This is almost a non-event as this company is one of the lowest market capitalization stocks in the MCCCI and therefore has a de minimis effect on the overall performance of the portfolio.

THE BAD

The following stock decreased by more than 10% (but less than 20%) which is my metric for inclusion in this category: Aurora Cannabis Inc.. (NYSE: ACB) - 12.5%. This is noteworthy as this stock has the fourth highest market capitalization of the 25 stocks in the MCCCI. I have a bearish outlook on ACB, as I indicated in my 7/9/20 article. There has been recent “chatter” about merger discussions with Aphria Inc. (NASDAQ: APHA) according to a 7/26/20 Motley Fool article. Industry consolidation (which is core to my thesis) of this magnitude would have a profound effect on the sector.

THE UGLY

There were no stocks that decreased by 20% or more, which is my metric for inclusion in this category.

RECAP

The relative strength index decreased by 5.3 % compared to last week’s increase of ~<1%. This suggests that valuations going forward may be underselling pressure going forward. This is consistent with a new metric I’m introducing which measures the valuation of the top 4 market capitalization stocks in the MCCCI as a % of the valuation of the 25 stocks in the portfolio. For Q3, there has been a 3-way statistical dead heat (45.2%, 45.3%, and 45.0%) My base case will be sustained if this metric doesn’t decrease very much going forward. Let’s see how this volatile sector has performed same time next week shall we?