As chatter about cannabis legalization below the border heats up, when will Canadian producers be able to tap into the opportunity in the booming US marketplace?
Operators in Canada have for the most part fallen out of favor, thanks in large part to poor financial results and a clear ceiling on what the domestic market can offer — especially compared to opportunities for US stocks.
While Canadian companies have targets in their sights and are talking about what their plays in the US could be, experts are cautioning market participants about the realities of the market.
Here the Investing News Network (INN) breaks down what’s ahead for Canada-based cannabis operators in desperate need of US opportunities.
Canadians on the outside looking in
Thanks to the notoriously hype-heavy conditions of the cannabis space, investors have long banked on the possibility of Canadian companies entering the US at some point in the future.
When dialogue surrounding reform or legalization efforts in the US ramps up, Canadian stocks tend to go on significant share price runs based on the promise of one day accessing the territory below the border.
But ultimately confusion persists about how soon Canadian companies will be permitted entry — as investors know, the political process surrounding cannabis in the US has been challenging, with many ups and downs.
While the recent MORE Act vote has sparked optimism about federal legalization in the US, the financial experts INN has spoken with believe it’s still not in sight. They are finding it difficult to get excited about a Canadian takeover in the US, particularly when the market is already flooded with operators.
Aside from that, Charles Taerk, CEO of Faircourt Asset Management, explained that even if federal cannabis policy changes, it still won’t be a simple process for Canadians to go to the US.
“It’s not as easy as just saying, ‘Well now it’s federal, game on!’ because that’s only step one,” he explained. “Let’s just say that tomorrow the US is legal — the Canadian companies would be on the outside looking in. Because even if there was federal legislation, they don’t have any state licenses to operate.”
Taerk also acts as one of the fund managers for the Ninepoint Alternative Health Fund, which regularly has cannabis names within its top holdings. “People are forgetting that there’s been hundreds of millions of dollars, if not billions, spent … building cultivation and dispensaries and processing facilities in different states,” he said.
Even so, as attention shifts from domestic sales in Canada to the fractured — but still ocean-sized — US opportunity, some Canadian cannabis operators are set on approaching plant-touching ventures in the country.
Currently the one open opportunity for companies with senior listings lies in the expanding hemp-derived CBD market, which Canadians can enter freely thanks to laws permitting the business of derivatives from hemp. Canadians have also attempted stake claims into the US market by way of M&A activity with an eye for the future.
“Even in the perfect world where US legalization happens, the Canadians would be far behind their US counterparts,” Taerk told INN. “I’m not sure that the Canadians would be tough competition.”
Canadians see rush of trading thanks to MORE Act vote
Matt Carr, chief trends strategist at the Oxford Club, told INN he wasn’t surprised to see Canadian cannabis companies receive trading attention in the lead-up to the MORE Act vote.
“(Canadian operators) are the ones that are easily accessed through platforms like Robinhood (NASDAQ:HOOD), where you don’t have any sort of special approvals to do, (you don’t have to do) over-the-counter trading,” he explained. “Everybody’s going to be rushing into those.”
Carr also believes the long-term outlook for the recent legalization bill is not as green as the market wants it to be.
“I do not think this session, especially with the midterm elections in the US on the horizon, that legalization — federal legalization — is going to happen at the moment,” he said. “But it is coming.”
Other experts have also told INN they expect the MORE Act to stall in the Senate again due to partisanship. It previously got stuck there after making it through the House back in December 2020.
However, some financial advisors have expressed enthusiasm about how MORE Act discussions could impact the SAFE Banking Act, which is attempting to make life a bit easier for publicly traded cannabis operators.
“There’s a lot more support for some type of federal reform for cannabis really coming from both sides of the aisle, more than at any point in the past,” Dan Ahrens recently told INN. Ahrens is managing director and chief operating officer at AdvisorShares Investments, as well as manager of two cannabis exchange-traded funds.
The SAFE Banking Act is a promising policy aiming to ease the financial business restrictions on US-based cannabis companies. It is expected that if this legislation were to clear Congress it would allow US companies to move their listings to more prominent US-based stock exchanges.
“But the SAFE Act does not support decriminalization or legalization of cannabis,” Nawan Butt, a portfolio manager with Purpose Investments, reminded investors when speaking to INN.
The investment expert was bullish on US operators long before they overtook Canadian companies in promise and market outlook. “There’s no near-term upside that we see for these Canadian companies vs. the US,” Butt said.
Expectations are changing for Canadian cannabis companies.
While they were once expected to expand from territory to territory, using their expertise and capital to grow, now they are facing stiff competition from their already established US counterparts.
Still, market research firm New Frontier Data is now projecting that sales of cannabis will reach US$72 billion by 2030, meaning growth opportunities continue to exist. This figure may compel Canadian companies with money and a solid vision to stick with their plans of taking a run at the plant-touching US market.
Don’t forget to follow us @INN_Cannabis for real-time news updates!
Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.