The cannabis sector has been a clear stock market winner over the past year, but as we get closer to the start date for legal recreational marijuana, what can investors expect from Canada’s pot stocks?
In the works are a near-term pause followed by further upward momentum in the intermediate-term, says analyst Javed Mirza with Canaccord Genuity.
Canadian cannabis stocks saw huge growth both in 2017 and during the first few weeks of 2018, and with the sector having levelled off over the past month, much is still up in the air during the lead-in to recreational legalization.
Last week, the Canadian Senate announced the date for their final vote on legal weed, set for June 7. The provinces and territories are likely to have between eight and 12 weeks of prep time following Bill C-45’s passage, which means that at its earliest, legal pot could be up and running by August.
Mirza says that with the Senate date now determined, investors can expect acceleration in the cannabis space leading up to the rec date.
“In our previous research, we had highlighted that a delay to rec legalization in the Senate was one of the few negative catalysts on the horizon,” says the analyst in a note to clients on Monday. “With a reported Senate deal in place that will result in a modest delay, but will likely see the first adult-use cannabis sale in August, we believe there are now few visible negative industry catalysts to slow the upward momentum for stocks.”
Mirza says that the current pause/pullback will likely be short-lived, followed by an intermediate-term uptrend, and then, once legalization occurs, a period of uncertainty.
“It is not until the second half of the year, when the rubber hits the road on the nation-wide roll-out, that we would become more cautious on the cannabis sector in Canada,” says the analyst.
For an indication of where the sector is heading, Mirza points to the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) which has had positive weekly momentum and has seen its relative performance trending higher in comparison to the TSX Composite, along with On-Balance-Volume in an uptrend, all of which are technical positives, says the analyst, suggesting that cannabis stocks could reaccelerate after the current pullback winds down.
In terms of individual stocks, the analyst refers to Canaccord’s ratings, which give Aphria Inc (TSX:APH), MedReleaf Corporation (TSX:LEAF) and CannTrust Holdings (CSE:TRST) all “Speculative Buy” ratings and Canopy Growth Corporation (TSX:WEED) a “Hold” rating.
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