Please ensure Javascript is enabled for purposes of website accessibility

Uh-Oh! This Is the News Canadian Pot Stock Owners Have Feared

By Sean Williams - Feb 8, 2018 at 7:39AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The July launch of recreational marijuana in Canada may be in jeopardy.

The marijuana industry simply can't be slowed of late. Even with a restrictive federal government in the U.S., North American sales of legal weed -- medical and adult use -- are expected to grow by 26% per year, according to cannabis research firm ArcView.

And it's not just pot sales that are charging higher. According to four polls since April 2017, Americans really want to see cannabis legalized. Though it varies by poll, at least three out of five respondents favor the idea of recreational legalization, with more than nine out of 10 in favor of legal medicinal marijuana, says the independent Quinnipiac University.

A lit cannabis joint in front of a red Canadian maple leaf.

Image source: Getty Images.

Canada is becoming the blueprint for cannabis reform

Yet in spite of this favorability, it's Canada that looks to take the lead on marijuana reform. In April 2017, Prime Minister Justin Trudeau introduced legislation designed to legalize recreational weed for adult consumption by July 2018. If Canada moves forward with the measure, it would become the first developed country in the world to have done so, and only the second country in the world behind Uruguay. Green-lighting adult-use weed could generate an estimated $5 billion in additional revenue for the pot industry in Canada.

Many of the signs have been pointing toward legalization. For instance, Canada's parliament is controlled by its more progressive party, meaning conservative concerns are predominantly being muted.

What's more, officials in December outlined a two-year tax-sharing agreement between the federal government and Canada's provinces. The deal will allow provinces to net 75% of tax revenue, with the federal government getting the remainder. This tax-sharing agreement is designed to provide the funding provinces will need to regulate adult-use weed on the front lines. It's also worth noting that the per-gram tax on recreational weed in Canada will be lower than the current tax on alcohol, which should allow domestically grown pot to be price-competitive with black-market cannabis. 

An indoor commercial cannabis grow farm.

Image source: Getty Images.

Canadian pot stocks ramp up in anticipation of legalization this summer

There's virtually no doubt in the minds of Canadian pot stocks that legalization is coming this summer. Practically every major grower has been working on organic expansion projects or making deals to expand their production.

Canopy Growth Corp. (CGC 4.72%), the largest marijuana stock by market cap, had a whopping 2.4 million square feet of greenhouses and facilities under construction or in development in British Columbia as of the end of its fiscal second quarter. It also has an option of leasing another 1.7 million square feet in B.C. to further expand its growing operations. 

Meanwhile, Aurora Cannabis (ACB 7.75%) is on track and budget with its flagship 800,000-square-foot facility known as Aurora Sky. Once complete in mid-2018, it'll be producing at least 100,000 kilograms annually at a low cost. Aurora also announced the acquisition of CanniMed Therapeutics just two weeks ago for $852 million. It's the biggest pot acquisition in history, and it'll wind up pushing Aurora's annual production over 130,000 kilograms. 

The same is true for Aphria (NASDAQOTH: APHQF), MedReleaf, OrganiGram Holding, Emerald Health Therapeutics, and practically any Canadian grower you can think of. Expansion is the top priority.

An hourglass on a table.

Image source: Getty Images.

This is not what Canadian marijuana stock investors wanted to hear

However, truth be told, risks still exist for Canada's recreational-pot law. In particular, provincial officials have warned the federal government on numerous occasions that the expedited timeline for approval of July 2018 wasn't a realistic date for getting law enforcement trained, and allowing growers and distributors to get pot into retail locations. Even with a tax-sharing agreement in place, provinces have cautioned that they don't have the manpower or funding to get the adult-use industry off the ground on the current timeline.

Until recently, these concerns have just been white noise. But according to recent comments from Canadian Health Minister Ginette Petitpas Taylor, they could throw a serious monkey wrench into investors' expectations.

According to a Reuters report on Tuesday, Feb. 6, Taylor said that recreational marijuana in Canada would go on sale a few months after the bill becomes law in July. "They [Canada's provinces] told us they need eight to 12 weeks following (adoption of the law) for preparatory activities to occur, such as preparatory movement of product from licensed producers to distribution and retail outlets," said Taylor. 

Even though Taylor's comments would suggest that the Canadian bill is progressing through parliament as planned, the timeline for recreational sales to begin has been pushed back a good two to three months. It's tough to say, but that could mean tens of millions of dollars, if not over $100 million, in expected sales that are now being pushed back.

It could also change the dynamics of the Canadian pot industry. Aphria, for instance, could be generating 230,000 kilograms of annual cannabis production by 2019. It's not set to complete its flagship project until late January 2019, putting it at risk of falling behind the likes of Canopy Growth and Aurora Cannabis, which are expected to complete their capacity expansions a few months earlier. This delay may remove some of the market advantage Canopy and Aurora had over Aphria, as well as reduce sales expectations for growers across the board. 

It's certainly not what Canadian pot stock investors wanted to hear.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
$1.53 (7.75%) $0.11
Canopy Growth Stock Quote
Canopy Growth
$3.77 (4.72%) $0.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.