Investors are seemingly enamored with marijuana stocks at the moment, and who can blame them given the enormous growth rates surrounding the legal cannabis industry? Of the marijuana stocks with market caps in excess of $200 million, quite a few have seen their valuations double or triple over the trailing 12-month period.
At the heart of this excitement is a mixture of legal sales growth and rapidly changing public opinion.
According to a newly published report from the Marijuana Business Daily entitled "Marijuana Business Factbook 2017," legal U.S. pot sales are expected to expand to a range of $5.1 billion to $6.1 billion this year, roughly 45% next year, and hit more than $17 billion in sales by 2021. At the same time, Mexico has moved forward with legislation to legalize medical cannabis, and Canadian Prime Minister Justin Trudeau recently introduced a bill to legalize adult-use recreational weed by July 2018. With so many sales still conducted illegally, there's optimism that billions could be moved into legal channels in the years to come.
At the same time, the number of American who want to see recreational pot legalized nationally is at an all-time high in both Gallup's 2016 poll and CBS News' April 2017 poll.
These three marijuana stocks had a rough week
However, not everything is picture-perfect for marijuana stocks -- just ask shareholders of Canopy Growth Corp. (NYSE:CGC), Aurora Cannabis (NYSE:ACB), and Aphria (OTC:APHQF), which saw their respective stocks close lower during the shortened week by 6%, 11%, and 6%. These losses made them among the worst-performing pot stocks last week. If these names ring a bell, it's because they're three of the largest Canadian-based medical cannabis producers and retailers.
Why no love for Canadian marijuana stocks? Chances are the weakness can be traced to the Canadian government's ongoing debate of recreational weed.
As reported by Huffington Post, the mayors of Canada's largest cities raised concerns about the regulatory costs associated with enforcement. Last year, a parliamentary budget officer estimated that sales tax revenue from legal recreational pot could range from as low as $356 million to as high as $959 million during the first year of legalization. But this money won't filter down to cover expenses tied to land-use issues, business license application processing, and the actual enforcement of the purchase, sale, and recreational use of the drug. Canada's big-city mayors have banded together to suggest that they need a slice of the revenue pie to make things work.
Additionally, Leafly reported late last week that Canada's conservative party, the Tories, want to cut out a provision that would allow Canadians to grow up to four cannabis plants in their household for fear that it would give children easy access to marijuana. One would think this would be a good thing for Canopy Growth, Aphria, and Aurora Cannabis given that all three are expanding their grow capacity, and all three would be primed to meet increased consumer demand if a homegrow provision were removed from the current bill. However, it also signals just how disjointed Canada's parliament could be when it comes to recreational marijuana.
Long story short, Canada's recreational pot bill is not a guarantee to pass, and investors are clearly concerned.
A tough road ahead for all pot stocks
Though investors in Canadian marijuana stocks received a bit of a wake-up call last week, all current and prospective marijuana stock investors should be taking note of the mountain of hurdles that lies ahead.
For example, the Trump administration has made it clear that the legal weed industry won't have a cakewalk. While Trump supported medical cannabis during his presidential campaign, recreational cannabis hasn't had that support. And with ardent weed opponent Jeff Sessions as Attorney General, the chances of any change occurring at the federal level are practically nonexistent with Trump in the Oval Office.
As long as marijuana remains a schedule I drug in the U.S. and is illegal for adult use throughout North America, pot-based businesses could face a number of disadvantages. Within the U.S., companies involved in the weed industry are usually unable to secure basic banking services, such as checking accounts or lines of credit, and they get stuck paying corporate income tax on their gross profits instead of net profits because they can't take any normalized deductions. Businesses are facing a number of obstacles that could adversely impact their bottom-line.
Finally, most marijuana stocks are still losing money, even with legal sales growth of around 30% per year. Canopy Growth and Aphria are both on track to generate full-year profits this year, but they are more the exception than the norm. Practically every cannabinoid-based drug developer is losing money, and a number of marijuana stocks are burning through a copious amount of cash on hand.
Until we get more clarity from the Canadian and U.S. government on recreational pot, investors would probably be best served staying on the sidelines.