A Bad Week for Weed: Paranoia and Bad Vibes Hit Pot Stocks

It’s been a bad week for pot stocks like Canopy Growth (TSX:WEED). What’s impacting the industry, and will the effects last?

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Sorry to harsh your buzz, folks, but legal marijuana sales will only be happening online in Ontario when the green stuff goes legit in October. The province has stated that this will be the case until spring 2019, when storefront sales outlets will start trading in the high street.

Pretty disappointing, right? The stock market certainly thought so, with Canadian cannabis stocks nosediving on the news. Watching share prices crashing in real time on Tuesday as investors got paranoid gave some indication of just how volatile cannabis is likely to be going forward. Will it stabilize in time to become a non-cyclical industry? Perhaps – though the marijuana landscape will look very different by the time that happens.

But this isn’t the only downer to come out this week regarding legal marijuana. According to Statistics Canada, a recent survey found that 82% of the public would not try legal marijuana when it becomes available, while only 28% of current users said that they might increase their consumption. This begs the question: where is that supposedly huge market growth going to come from?

Recreational weed might not be a growth sector after all

According to Statistics Canada, 16% of Canadians used cannabis in the first half of 2018; of those users, around a third spent nothing at all on the drug during the sample period of May to June, while a quarter spent less that $100. Those who spent in excess of $250 totaled 21%. While these figures are a little vague, a ballpark monthly revenue for recreational cannabis might be somewhere around $600 million.

That’s a fair amount of cash, but bear in mind that at present it’s currently going to the black market. Going back to those figures, the 18% of people who said they might try legal marijuana are most likely to be current users. This suggests that legal marijuana might only see initial revenue of a fraction of current black market cannabis income.

While other provinces are expected to hit the ground running with storefront outlets operating as of October 17, Ontario will have to wait, with suppliers having to hit the pause button on lease agreements for high street locations.

Competing supplies are likely to be an issue

Some commentators are starting to wonder whether a lack of legal weed outlets in physical high street stores will mean that the black market will be able to keep the initiative in Ontario.

However, it seems that this eventuality has been considered already: steep fines will await illegal weed retailers, with the potential to put such dispensaries out of commission. An official Ontario Cannabis Retail Seal under proposal may likewise deter non-federally qualified cannabis operations.

While some analysts hold that a six-month wait will have a negligible effect on the legal marijuana industry, others are starting to question whether the black market will be containable with an online-only presence in Canada’s most populous province. Compounded with a potential lack of growth in the sector, with reference to that Statistics Canada survey, it seems that the biggest danger to pot stocks might end up being disillusionment with over-promised demand.

The bottom line

In a week when investors look like they’re falling out of love with weed stocks en masse, perhaps it might make more sense to ditch your Canopy Growth (TSX:WEED) and buy Shopify (TSX:SHOP)(NYSE:SHOP) instead — and cash in on a possible mid-October surge of online sales activity.

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 Victoria Hetherington has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada.

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