TLRY - MJ: 4/20 Passes But Little New Bullish Hope For Pot Bulls

2023-04-22 07:08:41 ET

Summary

• Cannabis sales were higher YoY in Canada during January.
• The 4/20 commemoration of pot did little to buoy the share price of MJ.
• I continue to see a downside more likely than an upside in MJ.

4/20 has come and gone. Pot stocks settled at fresh all-time lows on Thursday despite much media attention toward marijuana and continued growth in the public's acceptance of its use as a recreational drug. According to Bank of America Global Research, cannabis reform is not a major priority in Washington D.C. at the moment, but as time wears on, the more likely it is that a bipartisan bill in favor of cannabis usage comes about.

Overseas, Czechia regulators plan to introduce a bill that would formally regulate the cannabis market. So, there are some favorable trends. What's more, total January retail sales of the drug rose 14% year-on-year.

But the question is: Can stocks in the MJ portfolio ever catch a lasting bid or will the fund eventually go up in smoke? I reiterate my sell recommendation for now - we are just not seeing enough improvements fundamentally or technically.

Canada Pot Sales Higher In January YoY

According to the issuer , the ETFMG Alternative Harvest ETF (MJ) tracks the Prime Alternative Harvest Index, designed to measure the performance of companies within the cannabis ecosystem bene?tting from global medicinal and recreational cannabis legalization initiatives. It is the first U.S. ETF to target the global cannabis industry. ETFMG notes that the global cannabis market is expected to grow at a CAGR of around 26.7% and reach $70.6 billion by 2028.

MJ's inception was in December 2015, and there were initially positive trends, but the performance has been dreadful since early 2021 when the blue wave took place in Washington D.C. Total assets under management is now near $225 million and the fund carries a high 0.75% annual expense ratio (as the fund AUM dwindles, the expense ratio may rise). There is a high 5.45% trailing 12-month yield (dividends paid quarterly), and MJ holds 34 pot-related stocks.

Digging into the portfolio, data from Morningstar show that it is very much a small-cap fund (due to the weak performance of its holdings) and leans toward the value style. While the price-to-earnings ratio is extremely low near 2, many non-profitable companies in MJ's portfolio skew the P/E. (7 of the fund's top 10 equity positions have negative forward earnings estimates, per Morningstar).

You will notice in the factor profile that momentum is very weak with the ETF while the earnings quality of its components is also poor. With high volatility, mainly to the downside, investors have caught little in the way of meaningful bounces lately.

MJ: Portfolio & Factor Profile

In terms of country and sector exposure, most of the companies are domiciled in North America (Canada is home to many cannabis firms) while 62% of the allocation is considered to be in the Healthcare sector with a good mix of other sectors.

Interestingly, Morningstar notes that nearly 30% of MJ's portfolio is actually designated in Real Estate by their determination. 52% of the fund is invested in the ETFMG U.S. Alternative Harvest ETF (MJUS) while Tilray (TLRY), Canopy Growth (CGC), SNDL (SNDL), and Cronos Group (CRON) comprise more than one-fifth of the fund.

MJ: Country and Sector Exposures

According to seasonality data from Equity Clock , MJ tends to pop very early in the year, but then trend lower through December. There is really not much to like or even discern from a bullish perspective right now.

MJ: Bearish Seasonal Trends

The Technical Take

MJ has been in a protracted downtrend off its February 2021 high. While not a perfect trend channel lower, clearly lower highs and lower lows has been the story. Recently, there is modest positive RSI momentum divergence, but both the 50-day moving average and long-term 200-day moving average are decidedly negatively sloped, further buttressing the trend-down narrative and data. Being at all-time lows, there is no reasonable support.

So, I continue to have a bearish outlook on the ETF. A rally attempt may stall near the late 2022 low near $4 while a bigger jump may meet selling pressure at the 200-day, currently just under $5. I would get more constructive if MJ climbed above its 200-day and if that trend indicator turned positively sloped.

MJ: A Stubborn Downtrend Persists, Modest Bullish RSI Divergence

The Bottom Line

I reiterate my sell rating on MJ. The trend lower is very intense, and 4/20 came and went without much in the way of positive industry news.

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