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Canada Legalizes Recreational Marijuana: What's Next for Pot Stocks?

By Keith Speights - Updated Jun 21, 2018 at 11:31AM

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There are five phases marijuana stocks will likely go through after Canada's historic vote to legalize recreational cannabis.

Weed won.

On Tuesday night, the Canadian Senate voted 52-29 to pass bill C-45, also known as The Cannabis Act. This was the final legislative hurdle to jump for recreational marijuana to become legalized in Canada. The only requirement now is royal assent by a representative of the Crown, which is merely a formality. 

Most Canadian marijuana stocks, including Canopy Growth (CGC -12.07%), Aurora Cannabis (ACB -38.46%), and Aphria (NASDAQOTH: APHQF), jumped on Wednesday after the historic vote. What's next? There will likely be five phases Canadian marijuana stocks will experience.

Marijuana buds next to piece of paper with "Yes!" written on it on top of tiny Canadian flags

Image source: Getty Images.

1. Preparation

Canadian provinces and territories will need between eight and 12 weeks to prepare for opening legal markets for the adult use of marijuana. Some are further along than others, but all provinces and territories must be ready before any legal recreational cannabis sales are allowed in the country.

Marijuana growers have already been preparing and will continue to do so. Efforts to expand production capacity will chug along. Companies will also scramble to secure approval to participate in the retail markets in the provinces and territories. Each victory on this front by any given marijuana grower could serve as a catalyst to its stock price.

2. Exhilaration

Retail marijuana markets will open throughout Canada in October. After that point, I expect many marijuana stocks will enter a phase of exhilaration and giddiness.

Sales should soar for big and small marijuana growers alike. Canada's Parliamentary Budget Officer (PBO) predicts the national cannabis market in the first year following the legalization of recreational marijuana will be between 4.2 billion and 6.2 billion Canadian dollars. Others think the actual figure could be much higher. Either way, marijuana stocks could enjoy some heady days as growers are able to sell everything they can produce.

3. Saturation

Production capacity will eventually catch up with demand in the Canadian cannabis market. How long will it take? My best guess is that we could see initial signs of saturation in the second half of 2019, followed by the feared supply glut.

This phase appears to be inevitable. The projected annual capacity of just the top five marijuana growers will be double the anticipated demand. When supply exceeds demand, prices fall. It seems likely that the market saturation phase could be devastating to stocks of marijuana growers that don't have low-cost structures. The stocks of bigger players like Canopy, Aurora, and Aphria could also be hurt, but probably not as much as smaller marijuana stocks.

4. Consolidation

We've already seen quite a bit of consolidation in the Canadian cannabis industry. For example, Aurora Cannabis has acquired several competitors, including the biggest marijuana deal ever with the buyout of MedReleaf (NASDAQOTH: MEDFF). After cannabis supply catches up with and surpasses demand, expect an even bigger wave of consolidation.

Aphria CEO Vic Neufield predicts that there will be "forced consolidation" after the supply glut hits. He believes larger companies like Aphria will be able to buy smaller marijuana growers for bargain-bin prices. I think Neufield is right. If so, investors holding shares of small marijuana stocks could ultimately face big losses. 

5. Globalization 

In one sense, the big marijuana growers are in a globalization phase now. Canopy Growth, Aurora Cannabis, and Aphria have made deals to expand into international medical marijuana markets, especially in Germany. However, my view is that globalization will be a much bigger story for marijuana stocks after the first four phases of the Canadian cannabis market.

Aurora Cannabis Chief Corporate Officer Cam Battley recently stated that many observers haven't "fully appreciated" the global medical marijuana market. He said this market could be as large as $180 billion annually in the future.

While I suspect Battley's estimate could be overly optimistic, his general sentiment about the global opportunity is probably right. The stocks of marijuana growers that capitalize most effectively on this opportunity should be tremendous winners over the long run.

Editor's note: This article has been updated to reflect the Canadian government's scheduling of recreational cannabis legalization taking effect in October 2018.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$4.88 (-12.07%) $0.67
Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.68 (-38.46%) $-1.05

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