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Ontario Is Ready to Light Up: Here’s How to Prep Your Portfolio

The recreational marijuana industry passed another big milestone last week as Ontario announced the how and where questions of purchasing legal marijuana in Ontario. The current timeline for legalization is still considered to be next July at a federal level, but provincial governments still need their own legislation to fill in many of the blanks left by Ottawa. Among those many voids is pricing.

Ontario is the first province to announce a framework for recreational marijuana use, and other provinces are no doubt working on their own versions that could offer a very different approach to what Ontario has proposed.

Specifically, Ontario premier Kathleen Wynne announced that the government-run outlets, operated by the LCBO, will be the sole path to purchasing recreational marijuana, apart from a government-run website. The Ontario plan also noted that recreational marijuana will be limited to private residences, with public places, cars, and workplaces all explicitly banned.

With respect to those government-run outlets, the province plans to have 40 stores ready next summer, with that number growing to 80 the following year and then to 150 in total by 2020. Despite the LCBO acting as the seller, the new stores will be standalone locations and not linked directly to existing LCBO stores, which has drawn considerable criticism from a variety of different sources.

The LCBO was already seen as being too restrictive, which led to a recent softening of regulations that made it legal to sell beer in some grocery stores, but now it will apply the same, if not stricter, control over marijuana products, which already have a massive distribution network.

What does this mean for your portfolio?

Canopy Growth Corp. (TSX:WEED) came into the spotlight last fall as the first marijuana stock to hit the market, garnering a massive amount of interest. The stock took off, hitting a $2 billion market cap in a relatively short amount of time, despite not having the revenue to back up that valuation.

Canopy continued to grow through much of the year, making all of the right decisions to set up a massive distribution network and increase production for what could be an annual $5 billion market.

Canopy’s acquisition of Mettrum Health was key to the company acquiring additional brands, additional patients, and an increase production base. An equally mastered acquisition was also made last year for Germany-based distributor MedCann. Germany does not yet allow companies to grow product locally, yet Canopy is a licensed supplier to the German market.

Looking back over the past year, much of the roller-coaster ride that the stock had last year has come to an end with the stock holding below $10. This has led some investors to deduce that the opportunity has passed and others to shy away from Canopy altogether, believing the stock was overvalued because of a bandwagon effect.

There is some value to this; Canopy was the first and only marijuana stock on the market at the time. Since then, both Aphria Inc. (TSX:APH) and Aurora Cannabis Inc. (TSX:ACB) have emerged and even offer similar promising growth without that roller-coaster ride.

Should you invest in marijuana stocks?

Marijuana is still a very new segment of the economy that holds plenty of potential. Pundits have often equated the opportunity presented as being similar to investing in liquor companies at the end of prohibition.

There’s also the legal question of marijuana. The federal government has long decreed that next July is the legalization date, but there are still more provinces without plans for legalization than there are with one. In other words, that July 2018 date, which is aggressive, could be pushed out even further.

In my opinion, a small investment in a marijuana stock is warranted, but investors should be looking more at the long-term potential of the market rather than the short-term roller-coaster ride.

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Fool contributor Demetris Afxentiou has no position in any stocks mentioned.


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