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Canadian Cannabis Companies Just Dodged a Bullet

By David Jagielski - Oct 24, 2019 at 10:53AM

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The federal election in Canada could have been a big setback for the young industry had Trudeau lost the prime ministership.

Stock prices for Canada's cannabis companies have been struggling since marijuana was made fully legal there last year. The reasons why are numerous: A poorly organized rollout resulted in there being too few retail shops across the country, CannTrust Holdings (CNTTQ -16.67%) was involved in an illegal growing scandal, and the companies themselves have delivered disappointing financial results.

The last thing that shareholders in these businesses need is even more adversity, but that could have been on the horizon had Canada's Prime Minister Justin Trudeau not retained power in this week's national election.

Marijuana legalization has been a polarizing issue on both sides of the American and Canadian border, and Canada likely wouldn't have led the way on it if Trudeau's Liberal Party were not in power. In 2015, when he was elected, he succeeded Prime Minister Steven Harper of the Conservative Party, a man who has described pot as "infinitely worse" than tobacco. 

While the current Conservative leader, Andrew Scheer, pledged to keep marijuana legal if his party took control of Parliament back, that doesn't mean that a Conservative government would not have imposed a lot more red tape and created hurdles for the industry. Critics have leveled a lot of blame at Trudeau over how the rollout has gone, particularly on the subjects of law enforcement and protecting the safety of Canadians. 

Marijuana leaf showing over top of a map of Canada

Image Source: Getty Images.

The CannTrust scandal made it easy for opponents to double down on the assertion that legalization was a mistake.

While some big challenges remain, there's definitely a bit more breathing room for companies banking on growth in those segments. By having a government in place that's supportive of the cannabis industry and that wants to see it succeed, companies won't have to worry about there being even more restrictive legislation being put into place that could inhibit their growth and that could affect new products. While the laws governing the industry aren't ideal, at the very least, they aren't likely to get worse.

Breathing a sigh of relief

For cannabis companies, the election results mean one less potential problem to worry about. And that's great news for businesses like Tilray (TLRY), shares of which are definitely in need of a boost after losing two-thirds of their value so far this year. The company has been struggling to stay out of the red; more growth from the edibles segment (with its potentially greater margins) could make a real impact on its bottom line.  

Tilray partnered with Anheuser-Busch InBev (BUD 0.39%) in a joint venture, Fluent Beverage Company, to research and develop beverages containing tetrahydrocannabinol (THC) and cannabidiol (CBD). Fluent expects to have its first CBD-infused beverages ready to bring to market in December -- the soonest that cannabis edibles can legally go on sale to Canadian consumers. However, beverages containing THC are further from market-ready. The compound is proving to be a lot more challenging than CBD to infuse into beverages, and Fluent is not providing a timeline as to when they will become available. 

What this means for investors

Ultimately, the election results are good news for shareholders of Canadian cannabis companies. At a minimum, there won't any additional headwinds out of Ottawa. While that alone won't be enough to lift the stock price of Tilray or other cannabis stocks, it at least paves the way for a smoother rollout for edibles.

One of the advantages that the cannabis 2.0 market will have is that with legalization now more than a year old, there are significantly more cannabis-focused retail outlets operating than there were. That should give the new edibles market a stronger tailwind as it gets off the ground. The lack of a strong retail model has been one of the biggest obstacles slowing the growth of the cannabis market in Canada. But as more retail shops open, and with plenty of new products coming over the next year or so, marijuana stocks could post strong growth.

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Stocks Mentioned

Tilray Stock Quote
Tilray
TLRY
Anheuser-Busch InBev SA/NV Stock Quote
Anheuser-Busch InBev SA/NV
BUD
$54.27 (0.39%) $0.21
CannTrust Holdings Inc. Stock Quote
CannTrust Holdings Inc.
CNTTQ
$0.05 (-16.67%) $0.01

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