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3 Pot Stocks That'll Benefit From Canada's Recreational Marijuana Bill Delay

By Sean Williams - Feb 23, 2018 at 8:21AM

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With adult-use sales unlikely before August or September, these marijuana stocks now have extra time to play catch-up to their peers.

With the exception of cryptocurrencies, there's arguably no investment more electrifying than marijuana stocks in recent years. Excitement is budding among investors following continued strong sales growth and a discernable shift in public opinion.

Despite strong support in the U.S., Canada is the cannabis blueprint of success

For example, within the U.S., every major poll over the past year has demonstrated overwhelming support for legalizing cannabis. Gallup, which has been conducting a survey on the public's perception of weed since 1969, found that 64% of respondents supported the idea of legalization in October. Meanwhile, even conservative outlet Fox News found 59% support for legalization in its most recent poll. This support is a big reason why most analyses call for average pot sales growth of 25% to 35% in the U.S. in the years to come.

Cannabis buds next to a piece of paper that says yes, and atop dozens of miniature Canadian flags.

Image source: Getty Images.

But in spite of this support, the U.S. marijuana market isn't a friendly place for businesses or investors. Cannabis remains a schedule I drug at the federal level, meaning it's entirely illegal, prone to abuse, and has no recognized medical benefits. Regardless of how the public feels, Congress, and Attorney General Jeff Sessions, have effectively chosen not to alter their stance on pot for the time being.

That makes Canada the default blueprint for cannabis progressivism. Having legalized medicinal marijuana in 2001, our neighbor to the north is working on legislation that would legalize recreational weed by this summer. In doing so, it would become only the second country in the world (after Uruguay) to legalize marijuana for sale to adults.

Three Canadian pot stocks that may welcome a recreational launch delay

Yet, even with strong expected support in Canada's Senate for such a measure, and a two-year tax-sharing agreement in place between the federal government and Canada's provinces, speed bumps remain. Namely, there are concerns about getting grown cannabis to distributors and retailers on time. Last week, these worries culminated in Canadian Health Minister Ginette Petitpas Taylor announcing that the launch of recreational pot would be delayed. Originally slated to go on sale by July 2018 (if approved), adult-use weed now looks to go on sale to the public between eight and 12 weeks after the scheduled June 7 Senate vote on Bill C-45. 

As you've likely surmised, the delay didn't sit well with marijuana stock investors. Valuation premiums on weed stocks are through the roof in anticipation of legalization and the expectation of strong sales growth. With that launch delayed, it took some of the wind out of investors' sails.

However, I'd contend it's not all bad news. In fact, three Canadian pot stocks may rightly benefit from a delayed recreational launch.

An indoor commercial cannabis grow farm with rows of plants.

Image source: Getty Images.

Aphria

Even though Aphria (NASDAQOTH: APHQF) sunk with its peers on news of the delay, it could wind up being a net-positive for the company.

You see, Aphria has dreams of becoming a top-four producer in Canada, and is currently on track to deliver as much as 230,000 kilograms of cannabis by February 2019. This production is expected to come from the completion of its four-phase, more than $100 million, expansion project that'll span 1 million square feet and produce 100,000 kilograms annually; a strategic partnership with Double Diamond Farms that'll yield 120,000 kilograms; and its recently completed acquisition of Broken Coast Cannabis, which should add 10,500 kilograms annually. 

But as you'll note, while Aphria has plenty of product to offer, it'll hit the market a few months after its peers. This isn't to say the demand for Aphria's product won't be there, so much as to suggest that Aphria could lose out on some critical long-term supply deals by completing its projects a few months later than its competitors. Given that the Canadian launch of adult-use weed is now delayed, Aphria can close this delivery gap a bit.

Considering how Aphria's management has focused on maintaining profitability, it remains one of the more intriguing companies to watch within the pot industry.

A cannabis bud atop a messy pile of hundred dollar bills.

Image source: Getty Images.

Cannabis Wheaton Income Corp.

Another surprising beneficiary of the delay just might be the first royalty marijuana stock, Cannabis Wheaton Income Corp. (CBWTF -8.79%). In return for supplying growers with upfront capital that they then use to expand their growing capacity or product lines, Cannabis Wheaton receives a percentage of crop yield at a well-below market rate. It then sells this received cannabis at market rates, pocketing the difference as its profit. The company has estimated an internal rate of return of around 60%, on average, for its deals.

On the surface, a delay probably seems like bad news. Since Cannabis Wheaton is a brand-new company, its start-up costs, interest expense on debt, and dilutive impact from bought-deal offerings, would suggest that it needs revenue sooner than later to satiate its shareholders. However, of the roughly 15 deals that the company has forged, most are with smaller or private operations. The delay will give these smaller, off-the-radar growers the opportunity to work out any production issues and deliver their licensed quota to Cannabis Wheaton. 

Just like Aphria, Cannabis Wheaton anticipates being able to deliver 230,000 kilograms of cannabis to market in 2019.

An indoor cannabis grow farm with rows of plants

Image source: Getty Images.

Emerald Health Therapeutics

Lastly, and along the same lines as Aphria, grower Emerald Health Therapeutics (EMHT.F 4.05%) could wind up benefiting from the delay in adult-use weed sales.

When all is said and done, Emerald Health could be working with up to 5.8 million square feet of growing capacity. This is derived from 1 million square feet, which includes its headquarters in British Columbia, 1.1 million square feet from a facility that's owned by Village Farms International and is being retrofitted from tomato production to cannabis growth, and the lease option for 3.7 million more square feet of capacity for its partnership with Village Farms, known as Pure Sunfarms, in B.C.

Unfortunately for Emerald Health, even with organic construction of its 1 million-square-foot growing facility, and the 1.1-million-square-foot retrofitted facility, it'll likely fall behind bigger players who stood ready to deliver as of July 2018. Though a one- or two-month delay may not look like much, it's added breathing room for Emerald Health to continue its retrofit and build-out in an attempt to catch some of the bigger players and land longer-term supply agreements. 

This delay definitely shook a few things up, and it'll be interesting to see if the cannabis-growing landscape is even more competitive come an August or September launch date.

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Stocks Mentioned

Emerald Health Therapeutics, Inc. Stock Quote
Emerald Health Therapeutics, Inc.
EMHT.F
$0.04 (4.05%) $0.00
Auxly Cannabis Group Inc. Stock Quote
Auxly Cannabis Group Inc.
CBWTF
$0.06 (-8.79%) $0.01

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