Recommendations from the Marijuana Task Force could impact marijuana stock prices
SmallCapPower | December 16, 2016: It has been an absolutely crazy 2016 for the marijuana industry in Canada. As the big stock price increases began to build after Canopy Growth Corp. (TSE:CGC) graduated from the TSX Venture exchange to Canada’s senior exchange back in July, investors piled in with anticipation that the recreational pot market would open up in the spring of 2017. Since we began writing about this space, we noted that one of the biggest risks to the entire industry and the realization of its potential was the implementation timeline, and investors didn’t see the larger implications we were dealing with. Anticipating that legislation is tabled in the spring of 2017, given the release of the Marijuana Task Force report, does not mean that marijuana will be legalized then as the Bill has to go through our democratic system and gain royal assent before being passed into law.
Important recommendations from the Task Force for the Industry
This is even more evident now that the Marijuana Task Force has submitted its recommendations and the government is giving itself until late 2018, early 2019 to open up the market for recreational marijuana. As one of the major pushes for the legalization of marijuana in Canada is the elimination of the black market in this country, the Task Force’s recommendation on the age of access being 18 has prompted kick back from various political leaders and will make the process of finalizing legislation much harder.
That being said there was still a number of positive revelations from the report that will help the prospects of the companies currently producing under the Access to Cannabis for Medical Purposes Regulation (ACMPR). As the Task Force has suggested that the production of recreational marijuana be subject to the same standards that the medical marijuana industry is subject to, it puts current licensed producer at a huge advantage. Also, the recommendation that marijuana not be sold in the same areas as alcohol or cigarettes, puts a damper on Premier Kathleen Wynne’s plans to have the LCBO become the main distributor. Regardless of the fact that most Ontarians are relieved at this, it benefits the producers in the industry to not have one sole purchaser/ distributor, as then they set the price at which they buy, and also benefits job creation as new store fronts will need to be opened up to service this industry.
This optimism was reflected in the stock value of many players on December 13th when the report was released, as Aurora Cannabis (TSXV: ACB) jumped 6.5%, Aphria (TSXV: APH) moved up 6%, and Canopy Growth Corp gained almost 8%. Furthermore, with the importance that the Task Force put on preventing driving while impaired by marijuana sent shares of Cannabix Technologies Inc. (CSE:BLO), a company developing a marijuana breathalyzer, 6% higher that day and is still climbing, sitting approximately 15% above its price at the opening bell on the 13th.
What’s Next for the Marijuana Industry?
Now that the Task Force has completed its review and submitted its recommendations, what’s next? We know legislation isn’t expected to be submitted for another 4 or 5 months, so what will happen to the industry in the meantime? If you take another look at our Marijuana Index here, and remember that we released this a day before the huge spike in prices that caused breakers to flip for multiple stocks, you’ll remember that our conclusion was that valuations were out of hand (EV/Fwd Rev multiples of 15.1x for Canopy, 9.3x for Aphria) and stock prices then were below current levels.
With the recreational market not expected to come online until early 2019, it leaves a long time before some of these companies’ sales will be able to justify their valuations. Yes, as announcements are made, you will see sentiment push valuations up and down, but if you try and capitalize on those you’re not investing, you’re speculating. We believe that the marijuana stock sector, for the most part, will sit idle as prices will average around these levels, or drop until at least next spring when the next rush of investor sentiment is created with the tabling of new legislation. That’s not to say that there won’t be big days for certain players as developments are made, such as Supreme Pharmaceuticals (CSE:SL) receiving its sales license, or Canopy Growth Corp continuing its acquisition phase, but those are impossible to predict and buying into producers at these prices, will make it hard to win.
The only place that could still be in for some movement is the peripheral market surrounding the industry, such as breakthrough technologies that will help increase yields/ reduce growing times, or help with the detection of marijuana for law enforcement. With the detection of marijuana in real time being a huge concern for the Task Force and the law makers moving forward, you can surmise that the development of such a device will certainly help the process, and alleviate some concerns.
Disclosure: The author currently owns small positions (<301 shares) in Supreme Pharmaceuticals Inc., and Cannabix Technologies, but has not received any financial compensation for any of the opinions, facts or statements made in this article.
