Go Back

Why it’s time to leave Canada and invest in US cannabis stocks

With the upcoming legalization of cannabis in Canada on October 17, investors have been injecting money into stocks of Canadian-based marijuana companies in anticipation of future highs. However, could it be that gains are already baked into Canadian stock valuations, and there are better opportunities in the younger United States marijuana market? Both markets have massive growth opportunities, but since the United States is farther behind with regulations, it could be that the U.S. market is better for growth-focused investors.

The Marijuana Index, managed by MJIC, Inc., tracks the most significant market players in the North American legal marijuana market. There are three indices which it tracks —North America, Canada, and the United States. Looking at these three indices can help determine how much market growth has been experienced in those three markets since its initiation on January 2, 2015.

[The rumor-mill reports that Aphria is eyeing a move to the NYSE]

The index starts at 100 for all three and tracks the equal-weighted return of the stocks in each index until today. To do an additional analysis for more recent history, we will also take a look at the index since this time last year, as well as in the past six months by restarting the tracking at 100 for both time periods.

The Canadian stocks have been in the lead since the index’s initiation. At the time of this writing, the Canadian Index had a value of 801.81 from its 100 starting point, over a 700 percent return since its initiation. This compares to the 230 percent return for the overall North American index and 25.7 percent return for the U.S. Index. Clearly, the U.S. stocks were bringing down the North American Index return since it wasn’t as strong as Canada. In the past year, the Canadian Index has yielded a 231.5 percent return, the North American index has yielded a 193 percent return, and the United States has yielded a 152 percent return.

Here is a graph comparing the weekly index prices of the three indices over the past year:

Source: Marijuana Index

While Canadian stocks have been yielding much higher returns in the past year and before, much of the return was between August 2017 and January 2018 following the mid-2017 announcement of full legalization in Canada by 2018. This drove most of this positive market activity in the Canadian market.

However, since this boom there have been further developments in the United States, leading to strong stock price appreciation with American stocks as well while Canadian stocks have leveled off a bit more. In fact, in the past six months, the American Index has yielded a better stock return of 69.3 percent as compared to a Canadian Index return of 22.1 percent and a North America Index return of 41.2 percent. Below is a chart outlining these returns with the indices reset to 100 six months ago to see the progress in relative terms (similar to how the Marijuana Index values started at 100 in January 2015).

Source: Marijuana Index

[Is Canopy Growth hiding (another) total crop failure from their shareholders?]

This might lead investors to question if now is the right time to enter into American stocks since the United States is in a similar regulatory state to Canadian stocks prior to the Canadian marijuana market boom. To better assist with this analysis, we can look at a timeline of regulatory progress in both Canada and the United States since the early 1900s.

Below is a timeline of marijuana laws for both the United States and Canada to compare the progression. August 2017 marks the real turning point for marijuana stocks as more licenses were given to Canadian companies for production and distribution of medical marijuana. Additionally, investors began trading with the anticipation of legalization in 2018.

Source: Marijuana Index

Based on Canada’s history, if the United States devises a date for full cannabis legalization, the American index will sharply increase similar to Canada’s at that time. While the U.S. currently has no plans in place to achieve full legalization at the federal level, Drug Enforcement Agency decisions such as the recent decision to allow GW Pharmaceuticals (NASDAQ:GWPH) to sell its marijuana-based anti-seizure drug are important steps in getting closer to legalization. This decision could arguably place the current U.S. federal regulatory state at Canada’s timeline point in 2013 where Canada put Marihuana for Medical Purposes Regulations into place.

[Aphria unveils a new slate of cannabis brands for Canada’s recreational market]

Other sources also support that federal legalization is not that far behind given the progress in states like California, Colorado, and Washington with their stances on medical and recreational marijuana use. This is because federal drug enforcement is difficult without local and state support, so it might not be a worthwhile fight as more states legalize it. Canada’s legalization will also provide data on profitability for the Canadian government in the form of taxes. If the economy booms in Canada, the United States might be especially motivated to move marijuana regulatory change forward.

Will Canadian cannabis legalization lead to tighter border regulations in the US?

Before investors dump money into American marijuana stocks thinking a regulatory shift and U.S. market boom is around the corner, another consideration should be the potential impact of Canada’s legalization on American views. While it could increase acceptance of marijuana production and use, especially if Canada shows positive medical trials, it could also go the opposite direction. If crime begins to increase in the United States from drug smuggling across the border, it could slow down regulatory progress if the U.S. feels there needs to be stricter border control. This would distract from moving directions the opposite direction and delay progress.

[Marijuana stocks weekend investor roundup: Analysis of the week's most important events in the cannabis industry (September 28)]

The U.S. Customs and Border Protection said in a statement regarding Canada’s legalization that “crossing the border with marijuana is prohibited and could potentially result in seizure, fines, and apprehension,” and that the agency will continue to detect the illegal importation of marijuana and other drugs from Canada. The U.S. is still taking this enforcement very seriously, so there still might be a lot of risks left in the American marijuana market at this time.

However, with more risk comes greater return. Maybe the United States marijuana market is better for investors looking for the highest future return given its infancy compared to Canada. The upcoming October 17 legalization should give some insight into how the markets will shift in both Canada and the United States.

 

Add comment