It seems cannabis names will either soar next year or plummet.
There doesn’t appear to be much middle ground as market strategists try to determine the impacts of the Trudeau government’s plans to legalize. For example, Canaccord Genuity analysts lowered their price targets on Canadian marijuana stocks this month after Health Canada streamlined its licensing process for medical production licences.
The ease of licences could increase supplies, affecting cannabis prices.
“[W]e surveyed the competitive landscape in light of a streamlined licensing process at Health Canada,” the Canaccord analysts said in a research note. “With the pace of licensing picking up and the prospect of intensifying competition, we lowered target prices across the board for Canadian LPs [licensed producers].”
There are persistent questions about the possibility of excess supply after legalization. Bloomberg reported this month that there are now more than 50 licensed medical producers in Canada and more than 800 waiting for licences. Those producers could supply a legalized, recreational market.
“If you ask people today why they don’t use [marijuana], it’s a small percentage who say ‘because it’s illegal,”’ Neil Boyd, a criminologist at Simon Fraser University in Vancouver, told Bloomberg. “In many respects there might be an overestimation of demand.”
But Cam Battley, executive vice-president of Aurora Cannabis (TSX:ACB), told The Canadian Press this week that producers need to ramp up production to meet next year’s demand after legalization.
“Right now, the existing capacity and what is already envisioned will not be sufficient to meet the needs of the adult consumer market,” Battley told CP.
“We need to expand our capacity right away simply to meet the demands of the rapidly growing medical cannabis system,” he said. “When the demand of the adult consumer system is layered on top of that, it’s a rush to build as much capacity as possible.”
Although marijuana stocks fell 23% to the end of May after the federal government announced its bills to legalize marijuana, the names have since stabilized in June.
Returns for the largest players were mixed, the analysts note, with Canopy Growth (TSX:WEED) up 7%, Aphria (TSX:APH) up 2%, and Aurora down 7%. That contributed “to a modestly negative 4% return for our Canaccord Genuity Cannabis Index,” the research note says.
“The biggest recent news (in our humble opinion) was our initiation of three stocks (Maricann, Cronos, and Invictus MD), and the addition of Maricann as our Top Pick amongst Canadian LPs,” the Canaccord note says.
Critics have called Canada’s marijuana stocks speculative, saying investing in them is akin to gambling.
But while the federal government’s legalization framework is expected to limit branding and distribution, it could still be a win for Canadian pot names.
MedReleaf (TSX:LEAF) also closed its IPO in June, raising about $100 million at $9.50 per share. The stock closed at $7.95 per share on Tuesday.
Another producer, Supreme, has received a licence to sell medical cannabis and is expected to start wholesale shipments to other licensed producer this quarter, Canaccord says.
The Canaccord analysts are bullish on cannabis oils, pointing to Quebec producer Hydropothecary Corp.’s (TSXV:THCX) release of a product called Elixir No. 1.
“We believe the future belongs to oil,” the analysts say. “The introduction of Elixir No. 1 increases the breadth of Hydropothecary’s overall product offerings, while allowing it to begin to penetrate the oil segment of the market, which is currently growing at close to 3x the rate of dried bud. In our view, as the market continues to grow and mature, oil products will begin to comprise a majority of industry sales.”
Horizon’s medical marijuana ETF (TSX:HMMJ) fell below $8.50 in June but has climbed since then, trading at about $9.50 on Tuesday afternoon.