Potential Stock-Trading Policy Change a Huge Negative for Canadian Marijuana Growth Stocks

Canopy Growth Corp. (TSX:WEED), Aurora Cannabis Inc. (TSX:ACB), Aphria Inc. (TSX:APH), and MedReleaf Corp. (TSX:LEAF) shares sold off Thursday following some negative news regarding potential trade policy changes. Here’s what you need to know.

| More on:

The Canadian Depository for Securities (CDS) is considering the non-facilitation of trades involving Canadian marijuana companies with U.S. assets. Marijuana is still illegal in the U.S., and if such a policy comes to fruition, Aphria Inc. (TSX:APH), which just came off an incredible quarter, may take a huge hit on the chin because of its U.S. expansion.

Although there have been issues arising as Canada approaches its legalization date, the stock-trading policy change is due to the differences in the Canadian and American government’s view of marijuana.

Some premiers are pushing to have legalization delayed to 2019, but Prime Minister Trudeau wants to address concerns as soon as possible, so the original hard deadline of July 1, 2018, can still be met. Although there have been many setbacks and the potential for additional delays, Canada is quickly approaching the much-anticipated nationwide legalization date, and it’s expected that the federal government will continue to grant more licences, so many more producers will be popping up on the TSX.

Aside from a few potential delays and uncertainty regarding the terms and the exact date of legalization, the marijuana industry is thriving in Canada, as producers like Canopy Growth Corp. (TSX:WEED), Aurora Cannabis Inc. (TSX:ACB), Aphria, and MedReleaf Corp. (TSX:LEAF) prepare themselves for the Canadian green rush once post-legalization demand surges.

Trump administration pushing for more regulation on marijuana and other illegal drugs

The real issue is with producers that have done business in the U.S., for which there aren’t yet clear plans to have nationwide legalization in the near future. In Canada, medical marijuana is legal, and recreational marijuana’s legality is on the horizon, but aside from a few states, marijuana is still highly illegal at the federal level in the U.S.

The Trump administration has made it very clear its plans to beef up the enforcement of federal drug laws. Attorney General Jeff Sessions, the administration’s task force on crime reduction and public safety, believes there exists a link between marijuana use and violent crime, and he’s been pushing for tougher penalties.

What does that mean for Canadian pot stocks with U.S. assets?

We can only speculate on what may happen right now, but it’s still possible that an alternative solution may be worked out. One thing is for sure: the flow of capital will be disrupted, and that’s not good news for the marijuana industry or Aphria, which pulled back 5.71% on August 3, 2017, following the underwhelming news.

It’s a real shame for Aphria in particular, because it has been firing on all cylinders when it came to operational efficiency, and the U.S. expansion plan sounded like a promising growth prospect. Although U.S. money may potentially not be coming in going forward, I’m not sure if investors should be dumping marijuana stocks at these levels.

As I’ve mentioned in the past, the headline risk for marijuana companies is huge, even for top-notch producers like Aphria, which arguably has one of the most efficient operations in the marijuana space right now.

Bottom line

If you’re a shareholder of a marijuana stock, then you might want to wait until we learn more about the specifics of CDS’s plan. It’s a clear negative not just for Canadian producers with U.S. assets, but for all marijuana stocks in general, since the prospect of U.S. expansion sounded like a very promising future initiative, and less money may be going into the Canadian marijuana industry as a whole.

Unfortunately, volatility will pick up because of this story, but as a marijuana investor, you’re probably already familiar with excessive amounts of headline risk, and if you’re not, then you’d better prepare yourself, because there’s definitely going to be more on the horizon.

Stay smart. Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any stocks mentioned.

More on Investing

tsx today
Stock Market

TSX Today: Why Record-Breaking Rally Could Extend on Thursday, March 28

The main TSX index closed above the 22,000 level for the first time yesterday and remains on track to post…

Read more »

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »