A huge milestone occurred on Thursday in the effort to legalize recreational marijuana in Canada. And on Friday marijuana stocks... fizzled.
On Thursday evening, the Canadian Senate voted 56-30 with one senator abstaining in favor of passing Bill C-45, which would legalize the adult use of recreational marijuana throughout Canada. However, none of the major Canadian marijuana stocks jumped significantly higher on the day after the vote -- and most of them declined. This is exactly what I expected to happen, though.
While the Senate vote definitely was a major milestone, it wasn't the finish line. Because of the more than 40 amendments attached to the legislation, the bill now will go back to Canada's House of Commons. The House can approve, reject, or modify Bill C-45 even more before sending it back to the Senate for yet another vote.
Still, legalization of recreational marijuana in Canada is closer than ever to becoming a reality. Although it didn't look like any marijuana growers that were big winners from the Thursday vote, appearances can be deceiving. Three stocks, in particular, should enjoy nice gains once the dust settles: Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), and Aphria (NASDAQOTH:APHQF).
1. Canopy Growth
Canopy Growth is currently the biggest marijuana grower in Canada. I suspect that it will also be the biggest beneficiary of the milestone vote last week when Bill C-45 finally becomes the law of the land.
My colleague Sean Williams recently pointed out why Canopy Growth is the king of cannabis in Canada. Perhaps the most important positive for Canopy listed by Sean that relates directly to the recreational marijuana market is brand recognition. Because Bill C-45 and some of its amendments place limits on what marketing can be done, Canopy's already-established and well-known Tweed brand should give the company a competitive advantage.
Canopy Growth has also been busy lining up retail locations. The company recently announced five retail locations in the province of Saskatchewan. It will also have retail outlets in Manitoba and Newfoundland and Labrador. Canopy has secured supply agreements for recreational marijuana with five of Canada's 10 provinces.
Of course, the key to actually making money from the Canadian recreational marijuana market will be having product to sell. Canopy Growth shouldn't have any worries on that front. The company already has 2.4 million square feet of growing space with a lot more on the way.
2. Aurora Cannabis
Aurora Cannabis rivals Canopy Growth for the top spot in the Canadian cannabis industry. That will especially be the case after Aurora's acquisition of MedReleaf is finalized.
Both Aurora and MedReleaf already have well-established brands in the Canadian medical marijuana market. The two companies combined won 17 Lift Canadian Cannabis Awards in 2017, including seven top prizes.
Like Canopy, Aurora has been preparing to hit the ground running in the retail market when recreational marijuana legalization takes effect. The company bought a 25% stake in Alcanna (formerly Liquor Stores NA), which operates 229 retail liquor stores. Alcanna plans to open 50 retail cannabis stores in Western Canada by converting some of its existing liquor stores and establishing new stores.
Capacity to supply the anticipated high demand for recreational marijuana shouldn't be an issue for Aurora. The company already operates two facilities that together have nearly 100,000 square feet of growing space. Aurora should also soon open its biggest facility yet -- Aurora Sky -- which will have 800,000 square feet of growing space. With its other expansion efforts and MedReleaf's planned production capacity, Aurora expects to be able to produce more than 570,000 kilograms of cannabis annually by the end of 2019.
Aphria isn't nearly as big as Canopy Growth and Aurora Cannabis. However, the company ranks in the top five among Canadian marijuana growers and should enjoy nice growth once recreational marijuana is legalized.
Instead of using an existing brand from the medical marijuana market, Aphria chose to launch a new brand for the recreational market. In April, the company introduced the Solie brand. Aphria CEO Vic Neufield said at the time that it would be "the first of many adult-use brands" from the company.
While Aphria will have to work to build brand awareness, the company should be in good position to compete on price. Aphria already produces cannabis at a cost of less than CA$1 per gram. In addition, the company should be ready to get its products in the hands of retail customers. Aphria signed a deal in May with Southern Glazer's, the largest wine and spirits distributor in North America, as its exclusive distribution partner for the Canadian recreational marijuana market.
What about capacity? Aphria has it covered. With its acquisition of Broken Coast Cannabis earlier this year and expansion efforts underway, the company should be able to produce around 225,000 kilograms annually by early 2019.
As mentioned earlier, there are a few more legislative hurdles to be cleared before the retail marijuana market opens in Canada. At this point, though, it appears very likely that Bill C-45 will be passed. An implementation date in September seems like a pretty safe bet.
It will be fun to see what happens after that. I think that demand will exceed supply at first but that a supply glut in Canada will follow, perhaps by late 2019. I also agree with Vic Neufield's prediction that a squeeze could be coming for smaller Canadian marijuana growers.
However, my view is that Aurora Cannabis executive Cam Battley was right on the money when he stated on Thursday that some investors are overlooking an even greater opportunity than the Canadian recreational marijuana market. Battley was referring to the global medical marijuana market.
Not every marijuana grower will be able to capitalize on this opportunity -- but I think the biggest potential winners from the recent Senate vote will be the biggest winners internationally also.