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Boom! Canadian Marijuana Stocks Just Got a Little Less Risky

By Keith Speights - Mar 23, 2018 at 2:33PM

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Recreational marijuana still isn't legal in Canada. But it's now one giant step closer.

Tension lingered in the air in the halls of the Canadian Senate chamber on Parliament Hill in Ottawa, Ontario Thursday evening. A group of senators hoped to block a bill that would legalize recreational use of marijuana in Canada from advancing in the legislative process. The absence of some swing votes from senators who were out of town gave the group hope that they would succeed.

But they didn't.

When all the votes were counted, the bill passed 44-29. There are still more hoops to go through before recreational marijuana is legal in Canada, but it was a significant victory for Prime Minister Justin Trudeau. And the vote on Thursday means that the risk level for Canadian marijuana stocks has gone down a notch.

A Canadian flag on a flag pole with the maple leaf replaced by a marijuana leaf.

Image source: Getty Images.

How stocks responded

The five largest Canadian marijuana stocks in terms of market cap are Canopy Growth ( CGC -3.57% ), Aurora Cannabis ( ACB -5.21% ), Aphria (NASDAQOTH: APHQF), MedReleaf (NASDAQOTH: MEDFF), and Cronos Group ( CRON -5.46% ). Each of these stocks had declined over recent weeks, at least partly because of the threat by some senators to try to derail the legislation seeking to legalize recreational marijuana.

However, with the risk removed for the latest legislative hurdle, all five of the big marijuana stocks jumped on Friday. Canopy Growth was the biggest winner, with the stock gaining more than 7% by midday. Aurora Cannabis wasn't too far behind, with gains on Friday of nearly 6%. The other stocks also moved higher, but by low single-digit percentages.

I think the magnitude of each stock's increase reflects to some degree the anticipated level of commercial success for each respective marijuana grower assuming recreational marijuana is fully legalized later this year. In its last quarter, Canopy Growth reported all-time high medical marijuana revenue -- not just for the company, but for any Canadian marijuana grower. The company should be poised to stand at the top of the recreational marijuana market, too.

Cronos Group had the smallest gain on Friday of any of the five largest Canadian marijuana stocks. I don't think it's coincidental that Cronos also has the lowest annual production capacity of the group.

What's next?

While Canadian marijuana stocks are now a little less risky than they were prior to the Senate vote, the story isn't over yet. The bill now goes to five different Senate committees.

There will almost certainly be plenty of political jockeying in the coming months. Any of the Senate committees could recommend amendments to the original legislation. Ultimately, the bill will come back to the full Senate for more debate and deliberation. A final vote is scheduled for June 7, 2018.

Some senators who are opposed to legalization of recreational marijuana think they'll get more independent senators to vote against the bill. Even the leader of the independent senators' group suspects that some of the group's members who voted for the legislation to advance to committee review will vote against it with the bill's current language.

So there's still a risk that the Senate won't pass recreational marijuana legalization. However, with the margin of victory on Thursday, it appears that the chances of passage are pretty good. But if the Senate passes the bill with amendments, there's yet another hurdle to clear. The bill will have to go back to the House of Commons for a vote.

After passage by both legislative chambers, one final step remains: royal assent. All Canadian legislation must be approved by a representative of the Crown. This is pretty much a ceremonial formality, though.

One other big risk

Don't think that Canadian marijuana stocks are out of the woods if legislation to legalize recreational marijuana passes. There is still at least one other risk that is the most worrisome of all: supply exceeding demand.

All of the major marijuana growers have been scrambling to increase production capacity. Canopy Growth says that it's on track to have over 5.6 million square feet of domestic growing space. Aurora Cannabis recently stated that its fully funded estimated output is 283,000 kilograms of cannabis per year. Adding up all of the other marijuana growers' capacity could mean that Canada will face a cannabis supply glut at some point.

This won't be a problem right out of the gate, though. It will take a while for the companies to reach their target production capacities. And Canada isn't the only market for Canopy, Aurora, and others. There are several large countries that have legalized medical marijuana, notably Germany.

Still, Canadian marijuana stocks do face more risks. But thanks to Thursday's Senate vote, they're at least a little less risky than ever before.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$9.99 (-3.57%) $0.37
Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$5.82 (-5.21%) $0.32
Cronos Group Stock Quote
Cronos Group
CRON
$4.16 (-5.46%) $0.24

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