Liberal majority a positive for marijuana stocks, says M Partners

The election of a Liberal majority government should usher in the legalization of marijuana, and publicly-listed Licensed Producers should be a big benefactor, says M Partners analyst Daniel Pearlstein.

On Monday, Justin Trudeau’s Liberal Party swept to a majority in the Canadian federal election. Throughout the campaign the party had a clearly pro-marijuana stance.

“We will legalize, regulate, and restrict access to marijuana,” says the party’s website, adding: “Canada’s current system of marijuana prohibition does not work. It does not prevent young people from using marijuana and too many Canadians end up with criminal records for possessing small amounts of the drug. Arresting and prosecuting these offenses is expensive for our criminal justice system. It traps too many Canadians in the criminal justice system for minor, non-violent offenses.”

On April 1st of last year, new rules were introduced that changed the Canadian government’s approach to marijuana and laid the groundwork for what many think is the inevitable legalization of the substance here. In the meantime, a half-step was taken. Under the Marijuana for Medical Purposes Regulations (MMPR), Health Canada no longer supplies marijuana to those with a proven medical need but instead has tasked licensed commercial producers (LPs) to do so. Currently, 22 companies hold 26 licenses to produce marijuana in Canada.

Pearlstein says the move towards legalization has taken a step forward but will likely take a year or two to pass through Parliamentary channels. He says the LPs are natural choice to supply the initial market, as they can provide brand-recognized, quality-assured product that could initially supply the market. The analyst thinks this is a positive for publicly-listed marijuana companies such as Canopy Growth Corp. (TSXV:CGC), which the analyst has a “Buy” rating and a one-year target price of $3.00 on.

“Though the MMPR industry is still very young and new regulations must be in place to unlock the full potential of the industry we believe that the value of a license should appreciate if investors can make the leap to understand that those carving out market share today are likely to be the ones doing so 10 years from now,” says Pearlstein.

Pearstein thinks that because concentration limits are unlikely to be capped, there is “massive” potential to expand marijuana-based product offerings into edibles and infused products.