Big Exhale for Canadian Marijuana Stocks

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Tensions were high on March 22 when the bill to legalize recreational marijuana came to a Senate vote on Canada’s Parliament Hill. While the expectation had been in favor of the bill passing, a group of senators in opposition still held onto the hope of blocking the bill in the absence of senators whose swing votes would have been in support of legalization.

The opposition did not succeed.

After a count of the votes, 44-29, the bill passed and will move ahead in Canada’s legislation. While there are more hoops through which to jump through before Canada declares recreational cannabis legal, the victory was significant, particularly for Prime Minister Justin Trudeau as well as for marijuana stocks in Canada.

Canada’s victory translates to a lower level of risk for the country’s marijuana stocks. 

Canada’s five largest weed stocks by market cap – Canopy Growth (NASDAQOTH:TWMJF), Aurora Cannabis (NASDAQOTH:ACBFF), Aphria (NASDAQOTH:APHQF), MedReleaf (NASDAQOTH:MEDFF) and Cronos Group (NASDAQ:CRON) – all experienced declining stock values over the past few weeks. In part, this decline was a reaction to the small group of senators who threatened to do everything in their power to derail the legislation to legalize recreational weed. 

However, with this latest legislative hurdle surpassed, a degree of risk for investors was also removed, resulting in all five of Canada’s largest marijuana stocks rising in value the following day. The biggest beneficiary was Canopy Growth whose stock rose more than 7% halfway through the day. Close behind, with nearly 6% gains, was Aurora Cannabis. Each of the remaining stocks also bumped up, though in smaller, single-digit percentages.

One could speculate, to some degree, each of these marijuana stocks’ values rose in proportion with its projected level of success commercially, pending the full legalization of recreational use marijuana later this year. Take Canopy Growth, for example, which reported not only a record high MMJ revenue in its most recent quarter, but, also a record high for all Canadian cannabis growers. As far as the recreational cannabis market is concerned, the expectation is Canopy Growth will rise to the top.

Alternately, Cronos Group experienced the smallest rise among Canada’s five major marijuana stocks. It doesn’t appear coincidental Cronos projects had the lowest production capacity per year when compared to the other four.

While marijuana stocks in Canada now pose less risk moving forward, investors can expect more political jockeying until the bill returns to the full Senate for a final vote on June 7. 

One victory down does not mean the story has concluded; from here, the bill must pass through five additional Senate committees before it returns for a final debate and deliberation in the full Senate. Each of these Senate committees may offer recommendations for amending the original legislation.

The hope of a few senators in opposition to legalizing recreational marijuana is to persuade more independent senators to join them in voting down the bill. Among the group of independent senators, the party leader has expressed misgivings about the group’s members who supported the bill’s advancement.

Investors cannot assume lowered risk translates to no risk. The final vote to legalize recreational marijuana may not ultimately pass. The silver lining is, given the margin of victory on March 22, the chances of the bill’s passage appear favorable. However, should the bill pass with amendments, another obstacle will need clearing in the path to legalization. Amendments attached to the bill would require it to return for a vote in the House of Commons.

The final step after the bill passages through both chambers of legislation is royal assent, which applies to every piece of Canadian legislation. Approval by a representative of the Crown, though a necessary step, is also largely a ceremonial formality. Once the bill passes through the Senate, it’s more or less a shoe-in to full legalization.

One final, more worrisome risk remains for marijuana stocks in Canada should the bill pass to legalization: the threat of a cannabis supply glut

Should Canada pass the final legislation to legalize recreational weed, the country’s marijuana stocks still face the very real possibility of supply overwhelmingly surpassing demand.

With legalization looming, Canada’s top cannabis growers scrambled for expansion in hopes of maximizing production capacity. Canopy Growth reported the company is on track for claiming more than 5.6 million square feet of cultivation space domestically. Aurora Cannabis’ estimated annual output for fully funded cannabis is 283,000 kg. A rough calculation of the total production capacity for all of Canada’s marijuana growers points to the very real possibility of a supply glut at some stage.

However, initially, this should not be the case, as companies will take some time to reach the production capacities they’ve set as targets. Also, Canopy Growth and Aurora Cannabis have markets outside of Canada which will help distribute some of the excess supply. Germany, for example, may soon become the world’s largest medical marijuana market and several other large countries have legal medical marijuana markets that could help ease the load for Canada.

In sum, while Canadian marijuana stocks are not out of the woods, investors looking for weed stocks to buy now have this recent Senate victory to thank for lessening the risk of investment.

(For more information, read Will Canada’s Glut Affect Marijuana Stocks?)

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