In January, California legalized recreational pot use and Canada is set to legalize recreational weed in July. However, in the United States, Attorney General Jeff Sessions has caused some concern regarding the future of the legal marijuana industry. In January 2018, Attorney General Sessions announced his removal of the barrier that prevented federal prosecutors from pursuing marijuana cases in states that had already legalized marijuana use. Attorney General Sessions issued a one-page memo addressed to all U.S. attorneys. In it, Sessions rescinded all previous guidance regarding marijuana enforcement. This includes policies and memos issued during the Obama administration that instructed federal attorneys to largely defer to state and local authorities with respect to prosecuting marijuana-related activities.
2018 seems like it might be a promising year for cannabis stocks in spite of Sessions’ attempts to use federal prosecution to smoke out marijuana use.
Sessions’ announcement is a sharp turn for someone who purportedly supports “states’ rights.” The topic of taking on legal marijuana is one that Sessions had all but explicitly promised when he was nominated as Attorney General.
His scorn for marijuana is no secret, but, it does not align with the opinion of a majority of Americans. A large number of Americans no longer view pot use with disdain. In fact, nearly 70 percent of Americans think that marijuana should be legal in some form, whether for recreational use, medical use, or both. This widespread approval by the general American public for marijuana consumption has also motivated seemingly disparate factions in the U.S. Congress to protect the legal marijuana industry.
The marijuana industry is expected to generate a whopping $2.3 billion in state tax revenue by 2020 which will inevitably have an impact on pot stocks.
After this memo was issued and made known to the public, Canadian MMJ stocks with no operations in the United States took a hit. Aphria, Aurora Cannabis, and Canopy Growth stocks fell by more than 20% in the days following Attorney General Sessions’ announcement, but, later bounced back.
These pot stocks fared better than Cronos Group, whose stocks fell nearly 35%, but, also later rebounded. Nevertheless, in part due to Attorney General Sessions’ memo, this pot stock is a better buy than it was just a short time ago.
The question remains: Why were Canadian pot stocks affected by the U.S. Attorney General’s memo?
The simplest and best explanation might be the sympathy effect. This happens sometimes when shares of a company tumble following bad news, affecting shares of another company in the same industry even if that bad news did not demonstrably affect the first company.
However, one wonders why Cronos Group garnered more “sympathy” than its other Canadian pot peers. There is no clear answer for this question. Cronos Group does not have operations in the United States nor has it announced plans to expand into the United States. Cronos Group has a smaller market cap than Aphria, Aurora, or Canopy Growth.
Nevertheless, to say Cronos Group’s weed stocks took a bigger hit because it is a smaller company is not necessarily accurate. There is at least one Canadian cannabis stock with a smaller market cap (Supreme Cannabis), but, this company’s stock fell less than Cronos’ did. Supreme Cannabis stock also trades at a much higher price-to-sales multiple than Cronos Group.
Although Canadian pot stocks took a hit as a result of Attorney General Sessions’ memo, this does not mean that marijuana stocks are doomed to fail.
For Cronos Group, as well as other companies that produce pot products, a number of opportunities exist just over the horizon.
The Canadian Parliamentary Budget Officer estimated that Canada’s recreational marijuana market could generate between $4.2 billion and $6.2 billion in total revenue after the country legalizes recreational marijuana consumption in July 2018. Deloitte, a professional services firm, projects that this market could actually bring in between $4.9 billion and $8.7 billion annually. Some estimates even put the market value at $12 billion annually.
All things considered, Cronos Group should be well positioned to capture a good portion of the Canadian recreational marijuana market, regardless of which estimate ends up being accurate.
Additionally, Cronos Group is expanding its capacity by building a 286,000-square-foot indoor production facility, scheduled to be operational by the summer of 2018. Cronos Group estimates its domestic capacity to reach 40,000 kilograms (or about 88,185 pounds) annually by 2019. Cronos Group is also interested in joint ventures with companies like Kibbutz Gan Shmuel, which currently exports medical marijuana to 35 countries throughout Europe and Asia, to reach international markets. Cronos Group also has an exclusive supply agreement with Pohl-Boskamp, allowing it to distribute medical marijuana to the German market.
Are pot stocks still a risky investment?
It depends on your outlook, and your predictions regarding the future of legal marijuana use and marijuana stocks in the United States and Canada. However, for enterprising investors with a high tolerance for potential risk, cannabis stocks could be a great addition to a portfolio. If you stocks do well, perhaps you can send Attorney General Jeff Sessions a note, telling him how his anti-legal marijuana memo helped your investment portfolio.
(To learn more about marijuana legalization and its affect on pot stocks, read State Victories Look Good for Marijuana Stocks.)