Canada's biggest national holiday -- Canada Day -- is on July 1 every year. But this year, many Canadians will celebrate another big day. So will many investors outside of Canada. And that day arrives this week: On Wednesday, Oct. 17, Canada's recreational marijuana market officially opens for business.
Major marijuana growers like Aurora Cannabis (NASDAQ:ACB), Canopy Growth (NASDAQ:CGC), and Tilray (NASDAQ:TLRY) have been scrambling to get ready for the opening of the adult-use recreational marijuana market. So have smaller players like Emerald Health Therapeutics (OTC:EMHT.F). What's likely to happen with these and other Canadian marijuana stocks this week?
Maybe little chaos, maybe a lot
Some Canadian government officials might say that the country is fully ready for the launch of the recreational marijuana market on Wednesday. But not everyone is buying that optimistic outlook.
Vic Neufeld is CEO of Aphria (NASDAQOTH: APHQF), one of Canada's top marijuana growers. He warned last week that "there will be sold-out signs" for recreational marijuana products across the country. Neufeld stated that many licensed producers (LPs) won't be able to fulfill their supply agreements with Canadian provinces.
There are several reasons behind Neufeld's predictions of a chaotic launch. Like many industry observers, he anticipates a very large demand for recreational marijuana right out of the gate. But while Aphria and its peers, both large and small, have been busy expanding production capacity, the capacity available on Oct. 17 isn't likely to be nearly enough to meet demand.
Neufeld also noted that Health Canada has a significant backlog in completing reviews of new production facilities. He said that "many LPs are jockeying for position" for the agency to conduct site visits of their facilities.
Another big question is just how ready Canadian provinces will actually be on Oct. 17. Neufeld didn't seem very confident in his comments last week, although he did say that Quebec is "probably the best-positioned" province.
How will all of this affect Canadian marijuana stocks? It depends.
A little chaos wouldn't necessarily be a bad thing. It's likely that marijuana stocks could jump if initial demand appears to be greater than expected, even if product shortages ensue.
On the other hand, too much chaos could be bad news. It might point to provinces being woefully underprepared for the recreational market. That could heighten investors' worries that it could take a long time for sales to reach anticipated levels.
Generally speaking, Canadian marijuana stocks are likely to move in the same direction this week -- up or down. Expect the tone to be set by the big players. If Canopy Growth moves higher, Emerald Health Therapeutics probably will too.
However, there could be some unique situations that cause a divergence between a given stock and the rest of the pack. For example, Emerald Health only has a supply agreement with British Columbia, while Canopy has supply agreements in place with all Canadian provinces. If British Columbia has more reports of problems than other provinces, Emerald Health would probably be negatively impacted more than Canopy would be.
There's also the possibility of other news unrelated to the Canadian recreational marijuana launch that could affect stocks. It's not out of the question that Aurora Cannabis could receive an extra bump compared to its peers if there's good news about its planned listing on the New York Stock Exchange.
And the magnitude of any moves higher or lower will no doubt be significantly different among Canadian marijuana stocks. Tilray, for instance, is likely to experience larger swings than most other stocks because of its relatively low stock float.
Most likely scenario
Don't discount the possibility that Canadian marijuana stocks could be relatively unfazed by the excitement over Oct. 17. After all, most of the stocks have already been rising as the big day approaches. There could even be a letdown. The old investing adage of "buy the rumor, sell the news" plays out quite frequently.
The most likely scenario, though, is that product shortages throughout Canadian provinces will receive a lot of publicity. Licensed producers will probably sell everything they can ship and scramble to ship even more. This would likely boost confidence among investors that the recreational market in Canada will be at least as big as many have predicted it will be. And that would set the stage for most Canadian marijuana stocks to enjoy nice gains this week.
Remember, though, that whatever happens this week will only be temporary. Sooner or later, supply will catch up with and surpass demand in Canada. Over the long run, demand for medical marijuana outside of Canada and progress in the U.S. toward changing federal marijuana laws will be much more important for Canadian marijuana stocks.
This should be a big week for the cannabis industry -- but it's only a week.