It was a classical case of selling the news as trader euphoria for cannabis stocks faded on Wednesday as Canada’s legalization of adult use of weed went into effect, dipping into a two month rally in the sector.
Aurora Cannabis was among the biggest decliners on Wednesday just after the market opened, sliding as much as 15% shortly after the open, the biggest drop since February.
Still, putting that drop into context, today's drop only brought most of the stocks to their lowest levels in a week. Tilray, which has surged more than 500 percent in the past two months, was the best performer, posted a 4.2% drop.
As Bloomberg notes, the sector has been on a tear since mid-August on optimism ahead of Canada’s move to become the biggest legal market for recreational use of marijuana. In a throwback to the lofty dot com days, the ETFMG Alternative Harvest exchange-traded fund has added 62% since hitting its 52-week low on Aug. 14, while the Horizons Marijuana Life Sciences Index ETF surged 70 percent in Toronto.
Heading into Wednesday, Bloomberg notes that the Top 10 stocks with the biggest gains from their yearly lows include some well-known companies such Tilray and Canopy Growth - the two biggest pot producers by value - and MadMen Enterprises, which bought medical pot firm PharmaCann for $682 million.
It also unveils some more recent darlings, such as India Globalization Capital, the heavy equipment rental business that also develops cannabis-based pharmaceuticals, as well as lesser known players that shot up under the radar.
Putting to shame last year's cryptocurrency gains, TerrAscend’s 1,400% climb from its 52-week low, reached a year ago this week, made it the biggest gainer ahead of Canada’s legalization of recreational pot Wednesday. The Mississauga, Ontario-based company, which produces medical and wellness products featuring cannabis, counts Canopy Growth and its investment arm, Canopy Rivers, among its top holders with a combined 24% stake. The top 20 names within the list include some of pot-investors favorite stocks such as Alkaline Water and New Age Beverages.
So how to trade the sector ahead as the key "news" catalyst is now behind us? According to Eight Capital analyst Graeme Kreindler, investors will need to take a more “tactical approach” to play the industry as the sector reacts and readjusts over the next 12 months, Kreindler wrote in a note Wednesday. He sees the market growing steadily in the first year as retailers expand, before giving way to more rapid growth in the second year as retail networks are established and other cannabis derivative products - such as edibles - hit the market in late 2019, Kreindler adds.
Kreindler’s top picks at the start of this legalization are Canopy Growth, CannTrust Holdings, HEXO Corp., Organigram Holdings and Emblem Corp.
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Finally, for those Americans curious how they can capitalize on today's historic day for Canada's cannabis culture, here are some key pointers , courtesy of Bloomberg:
How much will it cost?
While legislation from Trudeau’s Liberal Party sets up a sweeping federal system to license producers, it leaves retailing to the country’s 10 provinces and three territories, so the price will vary with location. These governments aren’t strictly regulating prices, but they are charging sales tax. Otherwise, market forces will prevail, and prices must be low enough to compete with the street dealers Trudeau promises to push out of business. Some estimates place the retail price for legal gear at about C$10 ($7.70) a gram. That compares with about C$7 a gram for the illegal variety, according to the federal statistics agency.
How much can I carry?
Federal law allows people 18 and older to possess as much as 30 grams. You can also have four plants in your home
Where can I buy?
It depends where you are, and some provinces are still figuring it out. In Toronto, you’ll have to order online because, due to late changes by the newly elected Ontario government, private, brick and mortar shops won’t be ready on time. British Columbia is setting up private, government-run and online stores, while in Alberta, it’s just private stores and online. Quebec is sticking with government-run cannabis shops. In Nova Scotia, on the east coast, you’ll be able to pick up your weed from government-controlled outlets, just like for alcohol.
Where can I smoke?
Unlike in Amsterdam, you won’t be able to consume recreational weed in coffee shops or hash bars. Some provinces, like Prince Edward Island, are restricting consumption mostly to private residences. Others, including Quebec and British Columbia, will allow you to smoke pot much like cigarettes, though in some cases with extra restrictions to make sure children aren’t nearby. Smoking in bars is banned everywhere in Canada, though it may be just a matter of time before private pot lounges, like cigar bars, begin popping up.
What are the risks?
Driving high is still illegal, and you’re now more likely to get caught. Police forces have been beefing up their specialized drug recognition training in preparation for Green Day. The U.S. Customs and Border Protection agency recently toned down potential bans for Canadian marijuana workers, saying they can be admitted if they don’t practice their trade in America. Agents will keep enforcing federal laws banning possession and trafficking even as some states have relaxed theirs.
Can I still buy from a street dealer?
The black market will generate a quarter of sales at the beginning, according to Statistics Canada estimates. Edibles like cookies remain illegal for now.
What if I just want to invest in legal weed?
Canopy closed Tuesday with a market value of C$15.8 billion, more than double that of Air Canada, the nation’s biggest airline. The shares have gained more than 400 percent in the last 12 months. Aurora Cannabis Inc. is up 385 percent. But there may still be room to run. The market’s potential is drawing interest from mainstream companies like Walmart Inc., Coca-Cola Co. and Molson Coors Brewing Co.
Estimates for the possible size of the market are laden with guess work, because sales depend on the size of the street market, how fast people switch over, and whether legalization brings new customers. Sales could also be sensitive to the legal price. That said, most government and private estimates range between C$3.5 billion and C$5.5 billion a year. For comparison, the latest annual tally of spending on beer was C$9.1 billion.
Can I order from outside the country?
While Canada restricts marijuana exports, British Columbia’s illegal shipments are already substantial, representing 59 percent of the nationwide total of C$1 billion, according to Statistics Canada. Smuggling may decline as police toughen enforcement, or hang on if criminals losing market share at home try selling more abroad.