MJ: Pot Stocks Rejected On Chart, Few Valuation Reasons To Be Long

Cannabis sales in Canada rose 10% annually in October according to data from Statistics Canada. The bad news was that month-on-month revenue was lower by 0.8% even with an extra day compared to September. BofA notes that on an adjusted basis, sales dropped 4% on the month.

With cannabis CPI positive, net ticket sales were even softer in the pot space. A bearish trend is seen in the broad supply of marijuana north of the border – Health Canada reported that more than 25% of Canada’s domestic cannabis crop was taken out in 2021, and more will be destroyed in 2022. BofA commented that too many production licenses and poor quality are the culprits for high supply.

Canada October Cannabis Sales Slip MoM

Bearish trends are also seen in the prices of cannabis stocks. The ETFMG Alternative Harvest ETF (NYSEARCA:MJ) tracks the Prime Alternative Harvest Index, designed to measure the performance of companies within the cannabis ecosystem benefitting from global medicinal and recreational cannabis legalization initiatives, according to the fund’s website.

MJ has been around for more than seven years and features total assets under management of nearly $300 million, making it one of the biggest marijuana funds. It is not cheap, though, as seen in its annual expense ratio of 0.75% and you’ll also pay some slippage costs as the median 30-day bid/ask spread is 19 basis points. MJ pays a quarterly dividend and features a 30-day SEC yield of 2.8% with 0.6ppt of security lending income, per ETFMG. Finally, the fund’s average 90-day volume is solid above 1.1 million.

With steep losses in the pot space since early 2021, the fund has trended lower in its average market cap size. Poor earnings growth has also led to more of the stocks becoming value in nature. As a result, the Morningstar style box shows MJ as a small-cap value ETF with low momentum, low quality, high volatility, and high liquidity. The fund’s price-to-earnings ratio is somewhat low, but not extremely cheap, near 12 with a price-to-sales ratio still above one. Overall, I do not see a ton of value here given several non-profitable firms in the portfolio and valuation ratios that are not indicative of a washout low yet.

MJ Portfolio Construct & Valuation Measures

MJ contains 37 total positions and the top 10 holdings, according to Morningstar, comprise 79% of the fund, so it is quite concentrated. As far as sector positioning, FactSet reports that it’s 52% in Health Care and 7% in Consumer Staples with most assets focused in North America (61% USA, 31% Canada).

A Concentrated Portfolio In Speculative Health Care Companies

The Technical Take

I was a hold on MJ back in October after a spike following bullish news of some positive industry reform. That hope was short-lived, as I generally expected. The stock rallied up to its 200-day moving average but was swiftly rejected there. Shares of MJ have now trended sharply lower after momentum broke to the downside a few weeks ago. I see the next stop being at a test of its downtrend channel support line which might come into play in the mid-$30s. While I identified a potential near-term long opportunity earlier in the quarter, there are both bearish short-run and long-term risks with MJ.

MJ: Pain Trade Lower

The Bottom Line

I see MJ as simply a trading vehicle for now. It’s not one for long-term investors aside from just pure speculative bets. With a steep downtrend and without a compelling value case, I’d avoid MJ.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.