Cannabis Markets

A Colorful Sector Undone by an Attack on Individuality

For the most part, my everyday clothes are grayscale.

My closet is lined with plain black T-shirts, plain gray T-shirts and plain white T-shirts. They’re all from the same manufacturer and the same line.

The pants I wear are the same – gray, black or khaki. Almost 90% of them are the same style from the same label.

It may be boring. But it’s uniform. It’s simple and clean. And I like it, even though I won’t stand out in a crowd.

Unfortunately, a similar approach to plain appearances is causing havoc in one of the market’s hottest sectors.

In fact, it’s just one of the issues that has investors around the world on pins and needles.

You probably know that, at the moment, Canada is the epicenter of the legal global marijuana industry.

As the first country to legalize pot for medicinal use in 2001, Canada’s medical marijuana industry has grown rapidly in recent years.

And in 2017, Canada passed legislation to legalize recreational pot use nationwide by this summer.

Canadian marijuana companies leapt to the top of a lot of investors’ lists… including my own. And they emerged as the best plays in the world for cannabis investors.

In fact, Canadian cannabis stocks rose 136.4% last year.

But it’s been a different tale in 2018…

In the last couple of weeks, several events have shaken the Canadian industry, sending ripples that are being felt around the world.

As I mentioned, Canada’s recreational market was originally supposed to go live in July.

For months, everything was moving along smoothly, according to plan.

But now, it might be pushed back as late as September.

At the end of March, Canada’s Cannabis Act (Bill C-45) was involved in a tense fight during its second reading in the Senate. There were some fears that the Conservatives against the legislation might be able to muster enough support to effectively kill the bill.

Obviously, this is a far cry from what we saw at the end of 2017.

Canada’s Liberal Party had more than enough votes in the House to get the bill passed. But this year, the margin wasn’t as overwhelming.

In the end, C-45 scored a narrow victory of 44-29 in the Senate.

Now the bill will go to committee, where the fighting is expected to be fierce. The deadline to pass the bill in the Canadian Senate is June 7, 2018.

That puts the original July launch of the recreational market in jeopardy.

So, in just the last couple of weeks, what was once considered a done deal now faces some unexpected uncertainty.

And it’s already been a brutal few months for Canadian cannabis companies…

Year to date, the Canadian Marijuana Index is down 28.6%.

Markets in the U.S. and Canada have struggled in 2018 as well. But not to this degree.

Added to the mix is Health Canada’s preliminary rules on packaging for cannabis companies, which sparked anger and uproar.

The proposals currently state that all cannabis sold to Canadian consumers must be in uniform, single color, plain packaging that doesn’t include brands or logos.

Like this…

There can be no lifestyle elements, testimonials or any sort of labeling that appeals to youth.

In turn, marijuana investors find themselves trapped in a monotone, boring nightmare.

For companies in competition with each other or trying to separate themselves from the crowd, it’s a frustrating announcement.

This has also meant that some of the biggest losers right now are some of the industry’s former stars.

For instance, shares of Aurora Cannabis (TSX: ACB; OTC: ACBFF) have fallen 37.7%, as have those of Cronos Group (Nasdaq: CRON), the first pure marijuana play to be listed on a major U.S. exchange.

MedReleaf (TSX: LEAF; OTC: MEDFF) shares have tumbled more than 44% since the start of the year. And Aphria’s (TSX: APH; OTC: APHQF) are down more than 50%.

I believe the legal pot market is one to watch in 2018. But for now, investors are forced to ride out the volatility. Some of it is sparked by bureaucracy. The rest is sparked by proposed rules that strip away all individuality.

Canadian cannabis companies might not be able to stand out from one another on the shelves right now. But I think they will separate themselves from the pack after we get through this near-term murkiness.

Good investing,