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Michael Scott

Michael Scott

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Michael Scott majored in International Business at San Francisco State University and University of Economics, Prague. He is now working as a news editor for…

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Supply Issues Weigh On Pot Stocks As Canada Goes Legal

MJ

As of yesterday, recreational use of pot is legal in Canada—now officially the world’s largest legal marijuana marketplace--and as Canadians lined up to buy their first over-the-counter stash, for pot stocks, a looming supply question threatens to kill the buzz.

For investors, it’s an exciting—but tricky—playing field, especially considering the variations in Canadian provincial laws (10 sets of laws in total). But the elephant in the room is supply, and the nagging concern that some of the darling companies might not be able to expand as quickly as they need to.

In many ways, the looming supply shortage makes for a fantastically tight market. But that’s a challenging window to navigate for all the some 120 federally licensed producers in Canada who are now competing to make good on their valuations for investors.

Indeed, Market Watch quoted Mackie Research analyst Greg McLeish as saying that the supply issue will be “severe”, right out of the legalization gate. In other words, starting today.

In the past 12 months, Canada’s marijuana stocks have jumped over 400 percent, but now they’re feeling the pressure of reality after possibly having flown too high, too fast.

So far this morning, pot stocks aren’t responding with the same enthusiasm as Canadians standing in line to buy it.

The investor dilemma is a big one.   Related: American Steel Downgraded As Trade War Escalates

At the market open this morning—and the launch of legalization—Canopy Growth (NYSE:CGC) was trading down nearly 5 percent, after seeing a nice spike on Monday, just two days ahead of legalization. And no one is being coy here: Even the top three cannabis companies say they expect shortages immediately.

(Click to enlarge)

The Monday boost wasn’t about Canada on the 17th, though. It was about Canopy’s announcement of an agreement to acquire U.S.-based hemp company Evergreen (ebbu)—a move that boosted investor confidence in Canopy’s expansion potential.

"Intellectual property and research and development advancements achieved by ebbu's team apply directly to Canopy Growth's hemp and THC-rich cannabis genetic breeding program and its cannabis-infused beverage capabilities," Canopy Growth said in a press release.

Canopy’s partners include alcohol giant Constellation Brands and Snoop Dogg.

Aurora Cannabis (OTCMKTS:ACBFF) was also trading down this morning, despite some good news.

(Click to enlarge)

As of late September, Aurora says it’s made some $540 million worth of investments that cushion against supply concerns by giving it upside outside of actual production.

Now, it’s planning to IPO later this month—even if it’s not a traditional IPO process—joining Canopy on the NYSE.

Then we have Tilray (NASDAQ:TLRY), which blew everyone’s minds last month, and was up 12 percent Monday, but today is already trading down 11 percent.

(Click to enlarge)

Tilray shot up more than 1,000 percent from its July 19th IPO price of $17, peaking at $300 a share on September 19th. That was a lot of money to be made on the market in only two months.

Related: From Gold To Bitcoin: The Evolution Of Money

But such a wild and sudden pace of growth based on future hopes is risky business for investors. 

Now that’s recreational pot is legal in Canada, Tilray is going to have put its money where its mouth is because it’s got a bigger market cap than any of its much bigger rivals. By production, this pure-play company is only the fifth largest, so justifying its $12.83-billion market cap is tough in the absence of fundamentals.

In other words, the speculation side of this wild cannabis game comes to an end with legalization. Now, the true fundamentals are going to have to crawl (quickly) out of the word work, and investors should be nervous.

By Michael Scott for Safehaven.com

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