Please ensure Javascript is enabled for purposes of website accessibility

The 4 Biggest Cannabis Question Marks for the Second Half of 2019

By Sean Williams - Jun 20, 2019 at 8:21AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The fast-growing green rush has a number of important questions that we want answered.

Over the past couple of years, marijuana has been a significant moneymaker for investors. Although not every pot stock has moved higher, buying a handful of the most popular growers and ancillary players would likely have yielded a return that ran circles around the broader market.

There are, however, pretty big question marks overhanging the industry as we head into the second half of 2019. Here are the four questions Wall Street and investors will be looking to get answered before the year comes to a close.

A vape pen sitting next to neatly arranged piles of dried cannabis.

Image source: Getty Images.

1. When, exactly, will Canadian derivative sales begin?

It probably goes without saying that the highlight of 2019 for the marijuana industry is the expected waving of the green flag by regulatory agency Health Canada on derivative products, such as edibles, cannabis-infused beverages (not containing alcohol), topicals, vapes, and concentrates. Oils and sprays are already legal.

Earlier this year, Health Canada signaled its intentions to legalize these alternative consumption options by no later than the one-year anniversary of Canada's recreational marijuana legalization date, October 17. But that doesn't narrow down exactly when Health Canada will be sounding the horn on derivative sales.

The reason marijuana derivatives get so much attention is because they're a significantly higher-margin product than traditional dried cannabis flower. Dried flower in select U.S. states that've legalized adult-use weed has steadily dropped in price, and the same will likely happen in Canada a few years from now. That makes derivatives an especially important piece of the puzzle for all major cannabis growers.

For example, CannTrust Holdings (CNTTQ 0.00%), which currently projects as anywhere from the third- to fifth-largest grower in Canada at 200,000 to 300,000 kilos per year, announced in late March its intention to acquire up to 200 acres of land for outdoor growing purposes. Although CannTrust hasn't been too specific, the expectation is that a majority of this outdoor-grown cannabis will be used for extraction purposes in the creation of derivative products, such as edibles and concentrates. This suggests that perhaps half, or more, of CannTrust's sales could come from high-margin derivatives.

Getting more clarity on the derivative sale kickoff tops the list of questions we want answered.

A judge's gavel sitting next a handful of dried cannabis buds.

Image source: Getty Images.

2. Can Health Canada make a dent in its application backlog?

Next on the list, investors are going to want to know whether or not recent policy changes made by Health Canada have begun to resolve the country's thus far persistent supply shortage of marijuana.

As reported by Marijuana Business Daily, Health Canada was buried underneath a backlog of nearly 840 applications, as of January 2019. While many of these licensing applications are for cultivation, they also include processing, distribution, and sales (with the average sales application taking nearly a year to approve, as of May 2018). Although this backlog of applications isn't the only reason there's a cannabis shortage -- a lack of compliant packaging, and a late start to capacity expansion by growers is also to blame -- it's probably the most visible reason.

Recently, Health Canada announced a change to the cultivation application process designed to weed out unqualified candidates (pun fully intended). All future applicants will need to have their grow farms fully constructed prior to submitting their paperwork. This should eliminate underfunded companies and allow Health Canada to approve growers that are ready to produce.

For instance, Aphria (APHA), which slots in as possibly the No. 3 grower in Canada at 255,000 kilos a year, when fully operational, has been waiting more than a year for Health Canada to OK its Aphria Diamond campus. Aphria Diamond, which was formed of a joint venture between Aphria and Double Diamond Farms and involves retrofitting existing greenhouses for cannabis production, will be capable of 140,000 kilos of Aphria's 255,000 kilos. However, nothing can be done till the green light is given by Health Canada.

Wall Street and investors will be looking for evidence that Canada's licensing backlog, and underlying supply problems, are ebbing in the second half of 2019.

Two businessmen in suits shaking hands, as if in agreement.

Image source: Getty Images.

3. Does Aurora Cannabis find its as-of-now elusive partner?

Sure, Aurora Cannabis (ACB 4.28%) may just be one pot stock among dozens of possible investment choices, but it also happens to be the projected leading producer of cannabis in the world. With 15 production facilities, many of which are located in Canada, Aurora estimates that it'll grow its annual run-rate production from around 150,000 kilos a year now to closer to 625,000 kilos a year by the midpoint of next year. By the time all 15 grow farms are running at full capacity, Aurora Cannabis could easily near 700,000 kilos a year of output.

Yet, one thing that's proven elusive to Aurora, thus far, has been a partnership with a global brand-name company. A number of its large peers have landed equity investments, whereas Aurora Cannabis has had discussions with the likes of Coca-Cola, but walked away without a partnership, joint venture, or equity investment.

In March, Aurora Cannabis announced the hiring of billionaire activist investor Nelson Peltz to act as a strategic advisor for the company. The founder of Trian Fund Management has keen knowledge of the food and beverage industry, which makes him a logical bridge between the cannabis industry and the soon-to-be-booming derivatives industry that includes edibles and nonalcoholic infused beverages.

The question is: Does Aurora get a deal done before the end of the year? It would only seem logical that, after hiring Peltz, Aurora would want a deal in place prior to the legalization of new consumption options by Health Canada. With this legalization timeline approaching, Aurora's fate remains a topic of great debate among investors.

U.S. voting booths with pamphlets attached.

Image source: Getty Images.

4. Will there be clarity for the 2020 U.S. elections?

Fourth and finally, Wall Street and investors will be hoping for some added clarity on the upcoming presidential and congressional elections in November 2020 in the United States.

Although these elections are still more than 16 months away, investors are going to be looking for signs that the Democratic field, which currently sits at roughly two dozen declared presidential candidates, is narrowing. More important is what handful of candidates rises to the top of the pack on the Democratic ticket.

Historically speaking, Democrats and Independents have a considerably more favorable view of cannabis than do Republicans, at least according to Gallup polling. The GOP-controlled Senate is a big reason why marijuana reform legislation hasn't been given serious floor time for debate. Senate Majority Leader Mitch McConnell (R-Ky.) has thwarted efforts to reform the pot industry before, and nothing short of a Democrat-controlled Congress has any shot of reforming the U.S. cannabis industry at the federal level.

Then again, party lines aren't always concrete. Democratic frontrunner Joe Biden has historically been averse to cannabis reform, though he's softened his stance in recent years. Meanwhile, Sens. Bernie Sanders (I-Vt.), Elizabeth Warren (D-Mass.), Kamala Harris (D-Calif.), and Cory Booker (D-N.J.) all support broad-based federal reform and legalization.

We're not going to know exactly which two candidate will square off for the presidency until sometime in 2020, but we can certainly hope for added transparency that'll help investors narrow the field considerably.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
$2.68 (4.28%) $0.11
CannTrust Holdings Inc. Stock Quote
CannTrust Holdings Inc.
$0.01 (0.00%) $0.00
Aphria Stock Quote

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.