3 Reasons to Remain Skeptical About Marijuana Stocks

Canopy Growth Corp. (TSX:WEED) and Aphria Inc. (TSX:APH) are surging after Ontario and New Brunswick announced plans for cannabis sales, but investors still have reasons to be cautious.

| More on:

On September 15, the provincial government of New Brunswick announced that it would create an entirely new Crown corporation to oversee cannabis sales. The province also announced a deal with Oranigram and Canopy Growth Corp. (TSX:WEED) to supply the fledgling market. The supply agreement stretches over two years and will include four million grams of cannabis in the first year, which will have an estimated retail value of $40 million.

The announcement from the governments of New Brunswick and Ontario seem to indicate that Canadian provinces will be taking an active role across the board in the sale of cannabis. The news has boosted the share price of Canopy, as it climbed 2.82% on September 18. Shares of competitor Aphria Inc. (TSX:APH) jumped 5.63% on the same day.

With all of the positive news for producers, there are still some reasons to be cautious when it comes to Canadian cannabis stocks.

Officials are still asking for delays

Police officials from several provinces have been pressuring the federal government to delay the July 2018 deadline set for legalization of recreational cannabis. Police have said that they still require more time to train officers about new laws and increase the amount on duty to test for impaired driving.

One of the focal points of the federal government push to legalize recreational cannabis has been to clamp down on the black market and defer to law enforcement when it comes to construction of policy. Provincial leaders also hinted at a delay over a month ago, but have since appeared to accept the original deadline. It remains to be seen whether or not pressure from law enforcement may convince the federal government to move the July 2018 marker.

U.S. representatives are urging caution

Public health officials in Colorado, which, in January 2014, saw the legalization of recreational cannabis, have urged for a delay on availability of edibles in the Canadian market beyond the July 2018 deadline. Edibles do not take effect as quickly as cannabis that is smoked, and thus carries with it the potential for overuse among those who are inexperienced in its use. Canopy announced in July that it had entered a licensing agreement with Isodiol International Inc. to manufacture and distribute its cannabis-infused edible products. Further study and delay on the edible market may be a concern for companies looking to cash in right away.

Provinces will struggle to keep up with demand

After the Ontario government announced its plans for cannabis sales, some private retailers came criticized the plan. These retailers believe that the plan is inadequate in that it will fail to sink the black market and will not be able to keep up with the surge in demand following legalization.

The Ontario government plans to open 40 stores initially and more when production catches up to demand. This could result in a transition period that could sour investor sentiment as more challenges sprout up for such a new and untested plan.

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 Ambrose O'Callaghan has no position in any stocks mentioned.

More on Investing

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 »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »