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It's Time to Adjust Your Marijuana Stock Expectations

By Sean Williams - Nov 2, 2018 at 9:23AM

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Supply shortages and regulatory red tape mean it's time for pot stock investors to face the facts.

The big day has come and gone for the marijuana industry. Back on Oct. 17, 2018, Canada became only the second country in the world other than Uruguay, and the first industrialized nation, to legalize recreational cannabis. Waving the green flag on adult-use pot is widely expected to be a game changer for the legal pot industry, eventually generating billions of dollars in added annual sales.

Unfortunately, the wait for those billions of dollars in sales could wind up taking a lot longer than most folks initially expected.

A Canadian flag with a cannabis leaf instead of a maple leaf, with the stamped words, Sold Out, emblazoned on the front.

Image source: Getty Images.

Cannabis shortages wreak havoc in Canada

Although demand roared out of the gate for recreational marijuana in all provinces and territories, shortages were quick to hit in a number of provinces. Select shops in Manitoba ran out of product in mere hours, whereas online ordering in Quebec has been compromised by many products being out of stock. Manitoba, in particular, wasn't all that confident that it'd have its supply shortage resolved anytime soon, either.

Meanwhile, other provinces, such as Alberta and British Columbia, may have the product at the ready, but are dealing with the slow and arduous process of getting dispensaries licensed and in operation. Combined, Alberta and British Columbia have just 18 retail locations in operation right now, which is a drop in the bucket given the adult population of each region.

These supply hiccups, which most pundits could foresee, save for the Canadian regulators themselves, are almost certainly going to impact the sales potential for recreational weed in 2018. In fact, one investment firm, GMP Securities, has already begun slashing forecasts for a number of marijuana stocks.

Scissors cutting through a hundred-dollar bill.

Image source: Getty Images.

Be warned: Wall Street is cutting marijuana stock forecasts

Per GMP Securities analyst Martin Landry, courtesy of Financial Post, most licensed producers are liable to see their revenue adversely impacted. Landry specifically points out Canopy Growth Corp. (CGC -1.40%), CannTrust Holdings (CNTTQ -54.55%), and Cronos Group (CRON 1.42%) as being among the most impacted.

Landry suggests that Canopy Growth may be hit the hardest because of not one but two issues. In addition to the distribution problems affecting the entire industry, Canopy Growth has chosen only to stock one strain of cannabis for online sales at OCS (the Ontario Cannabis Store). Though this ensures that Canopy has enough stock on hand to meet orders, and therefore never runs out, the company's choice not to offer a broader variety of product could cost it market share. GMP reduced its market share forecast for Canopy Growth from 33% to only 20%.

As for CannTrust and Cronos Group, GMP specifically pointed to various production issues. Landry notes that CannTrust shipped very little cannabis in September, and blamed this shortage on packaging capacity problems. GMP cut its sales expectation forecast for CannTrust to just 100 kilograms in September from 1,000 kilograms.

The reduction for Cronos was even steeper, with shipments reduced to 100 kilograms from a prior projection of 1,800 kilograms. GMP, which blames Cronos' problems on delays in receiving necessary excise stamps, slashed the company's third-quarter revenue estimate to 3.6 million Canadian dollars from CA$11 million. 

A researcher in a white lab coat taking notes on a clipboard in the middle of a hemp farm.

Image source: Getty Images.

This is the bigger issue

If investors zoom out a bit, they'd see that the more pressing concern is that these shortages may not be resolved anytime soon.

To begin with, Health Canada is responsible for approving cultivation licenses and sales permits. However, the regulatory agency has been inundated on both accounts. As of May, per Marijuana Business Daily, the agency had more than 500 cultivation applications in queue, some of which would be approved in months and others that could take years.

What's more, getting the OK to produce cannabis is only half the battle. Health Canada also needs to grant a grower the permit to sell it. Back in May, when 104 companies were allowed to grow marijuana, just 48 were allowed to sell it. Just over two dozen were granted the OK to sell oils and extracts. In the meantime, the average length of time between submitting a permit to sell weed to Health Canada and receiving approval was (drum roll, please) 341 days. That's nearly a year wait just to be given the green light to sell what's been grown.

This mountain of red tape is what's really putting the stranglehold on near-term production.

It's going to take quite a bit of time, even with cultivation licenses and sales permits in place, for pot growers to get up to speed. Combined, Canada's projected four largest growers -- Aurora Cannabis, Canopy Growth, Aphria, and The Green Organic Dutchman -- could produce in excess of 1.5 million kilograms a year when at peak capacity. Right now, they're combining for about 120,000 kilograms a year. That's not even 10% of their peak potential, and it shows just how far this industry has to go before it's running on all cylinders.

Whether you're a fan of the cannabis industry or not, it's time to adjust your expectations.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$2.81 (-1.40%) $0.04
Cronos Group Stock Quote
Cronos Group
CRON
$2.86 (1.42%) $0.04
CannTrust Holdings Inc. Stock Quote
CannTrust Holdings Inc.
CNTTQ
$0.01 (-54.55%) $0.01

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