Marijuana buds grown indoors. Picture: 123RF/ ERIC LIMON
Marijuana buds grown indoors. Picture: 123RF/ ERIC LIMON

Pot stocks have broken their three-week winning streak, a somewhat ironic shift in sentiment given that last week was full of positives on the US cannabis policy front.

In separate addresses, the governors of New York and New Jersey each said they will make legalisation of recreational cannabis a priority for 2019, potentially opening up a new market with a combined population of close to 30-million.

Perhaps more importantly for the future of the industry, US attorney-general nominee William Barr said he would respect state marijuana laws even though he personally disapproved of legalisation. He also urged Congress to make a country-wide decision on the drug’s legality.

It’s a far cry from his predecessor Jeff Sessions, who once told a US Senate hearing that “good people don’t smoke marijuana” then rescinded an Obama-era policy that took a hands-off approach to the drug.

At the time, there was genuine concern that the burgeoning US pot industry might be halted in its tracks. The reality, of course, is that expansion continued unabated. US spending on legal marijuana is expected to reach $22.2bn in 2022 versus $5.9bn in Canada, according to a report released last week by Arcview Market Research and BDS Analytics.

Last week, there was a major milestone for the industry as the descheduling of hemp in the US farm bill starts to bear fruit. Canopy Growth said it would spend up to $150m to build its first production facility in the US, kicking off what is certain to be a wave of Canadian producers moving into the American hemp market.

The real opportunity here is not hemp but its extract cannabidiol, better known as CBD. CBD is quickly being touted as a potential new wonder drug, with proponents saying it eases everything from anxiety and insomnia to pain and inflammation. Various estimates say the US consumer market alone could be worth tens of billions of dollars.

Caution

Caution is warranted however, as the Food and Drug Administration has said CBD cannot be added to food or health products without agency approval, meaning it may take longer than expected for CBD foot cream or elbow braces — two potential products touted by Tilray in its tie-up with Authentic Brands Group — to materialise.

Canadian Imperial Bank of Commerce came out last week with a lengthy initiation note, giving Canopy and Cronos Group outperformer ratings and Aphria a neutral rating. It is a compelling read and a reminder to those who get bogged down in the day-to-day of this industry of the paradigm shift under way.

“Investors rarely get to witness the birth of an industry,” analyst John Zamparo wrote in the note, published on January 17. “Such historic events include the gold rush, inventions of the automobile and aircraft, and the internet.”

But Zamparo pointed out that as in the above examples, “very few companies live up to their lofty expectations”. He said only a handful of firms would come to dominate the global market and believes Canopy and Cronos will be two of the winners, largely because of the investments both have received from outside industries (alcohol in Canopy’s case and tobacco for Cronos).

The Canadian government released data on the first full month of legal recreational sales last week, with total sales of dried cannabis up 22% and total sales of cannabis oil up 14% from October. Given that recreational use was only legal for half of October, these numbers felt a little light to some analysts. Indeed the numbers show that total recreational sales per day decreased by 42% month-on-month, according to Eight Capital analyst Graeme Kreindler.

Demand is clearly not the problem, as supply shortages persist across the country. Instead, it appears to be due to bottlenecks “at multiple points in the supply chain,” including limited cultivation capacity, licensing delays, a shortage of qualified labour, lack of bricks-and-mortar store locations and limited product choice, Kreindler wrote. He expects the issues will begin to subside in the back half of 2019.

Bloomberg