This has been a year of big gains for the marijuana industry, even if it's been quite the opposite for marijuana investors, who, in many instances, have seen their pot stocks fall by 25% or more this year.
In particular, it's been a year of legitimacy for the cannabis industry. In October, Canada became the first industrialized country in the world, and only the second overall, to legalize recreational pot. Though it'll take a few years for growers to ramp up their production, this legalization validates the cannabis business model and paves the way for billions of dollars in added annual sales.
We also witnessed a handful of U.S. states giving the green light to marijuana and saw the U.S. Food and Drug Administration approve its very first cannabis-derived drug.
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Three cannabis questions we want answered
But as we get ready to turn the page on 2018, big questions await the industry and marijuana stocks. Here are three questions that should be at the forefront of investors' minds as we enter the new year.
1. Will Canada's Parliament legalize alternative consumption options?
One of the bigger overhangs as we head into 2019 is whether we'll see Canada's Parliament actively discuss and approve new consumption options for cannabis, as expected by pundits.
As a refresher, when the Cannabis Act was passed in June, it only legalized dried cannabis flower and cannabis oils, which includes products like softgel capsules. Other potentially popular alternative forms of consumption, such as edibles, cannabis-infused beverages, vapes, and concentrates, aren't yet legal in Canada. This is important, because these alternative consumption options usually have higher price points -- and much juicier margins -- than dried cannabis flower. They offer a quicker path to recurring profits for pot stocks.
Additionally, alternative products are the dangling carrot that's attracted brand-name companies to partner with or invest in marijuana producers.
For example, Molson Coors Brewing (TAP 0.11%) announced at the beginning of August that it was forming a joint venture with Quebec-based grower HEXO (HEXO), with the duo focused on creating a line of cannabis-infused beverages. Molson Coors Brewing has seen a steady decline in beer market share in Canada and is looking for a way to reignite growth, while HEXO is a fringe top-10 producer at peak capacity and striving to make a name for itself in a crowded field of growers. Molson Coors brings its deep pockets and marketing expertise to the joint venture, while HEXO offers its unique cannabis industry knowledge. But this partnership can't blossom until Canada's Parliament discusses and approves new consumption options.
If alternative products aren't given a green light by summer, it could be time to reduce profit expectations for a number of pot stocks.
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2. Can Health Canada work through its application backlog?
An equally important question that needs answering is whether regulatory agency Health Canada can make a dent in its cultivation license and sales permit application backlog.
According to a report from Marijuana Business Daily back in May, cultivation license applications had soared in 2018, with Health Canada sitting on more than 500 for review. On average, these cultivation licenses were taking many months, if not years, to approve or deny. Completing a greenhouse facility is quite the accomplishment for marijuana growers, but it's pretty meaningless if companies haven't been given a green light to plant and harvest cannabis.
Then, assuming they do receive approval from Health Canada to cultivate marijuana, growers also need the agency to issue sales permits. As of May, the average sales permit was taking 341 days to approve. No pot grower was able to receive a sales permit in less than about four months.
The reason investors want this question answered is because weed shortages have been cropping up all over Canada since day one of legalization. The only way demand will meet supply in the near term is if Health Canada finds a way to work through or expedite its application backlog. Should Health Canada's struggles continue throughout 2019, it could result in growers not being able to capitalize on domestic and international demand.
Image source: Getty Images.
3. Will banks finally step up for the marijuana industry?
Investors should also keep a close eye on financial institutions to see if they finally step up and provide broad-based financial services to the cannabis industry.
Prior to the passage of the Cannabis Act in June, banks wanted almost nothing to do with the marijuana industry. Even with the Canadian federal government and U.S. federal government taking a hands-off approach to cannabis regulation, banks feared that they would potentially face criminal and/or financial penalties if caught offering financial services to pot-based businesses.
Since the passage of the Cannabis Act and the ongoing legalization of marijuana at the state level in the U.S., not much has changed. A few banks, such as the Bank of Montreal, have worked on traditional financing deals with some of the industry's largest companies by market cap. But this is an exception rather than the norm.
Without access to basic banking services -- e.g., a checking account, a line of credit, or a term loan -- marijuana stocks are regularly forced to turn to dilutive capital-raising options, such as bought-deal offerings. In a bought-deal offering, common stock, convertible debentures, stock options, and/or warrants are sold in order to raise capital. While successful in their purpose, they wind up hurting shareholders.
Will banks step up for the weed industry in 2019? That remains to be seen.
