Canadian cannabis stocks are ripe for a rebound, Canaccord Genuity says

After a humdrum February, Canada’s cannabis sector is likely to rebound over the near term, says analyst Matt Bottomley of Canaccord Genuity, who says upcoming news in the sector should allow for further market expansion.

So far, 2018 has seen both ups and downs for Canada’s pot stocks. January saw about 1.9 billion of capital raised and, by mid-month, a number of cannabis stocks had hit all-time highs. Yet, there’s been a decided drag every since, effectively erasing much of those gains made at the start of the year.

Other factors have added more uncertainty to the industry, too, such as recent news from Canada’s Senate that passing of Bill C-46 could be further delayed, as a study of the proposed law concerning drug-impaired driving was suspended for another two months. While a late-August date had been recently floated, now some senators are suggesting that the end of 2018 might be a more realistic timeline for recreational legalization.

"We will go back at C-46 in May with more hearings, as we still need to hear from some people, with the intention of sending the legislation to the Senate for third reading in June," said Conservative senator Pierre-Hugues Boisvenu, vice-president of the Senate’s legal affairs steering committee.

However, Bottomley says that whether the start date comes by late summer or sometime in the fall/winter will ultimately make little difference.

“We do not believe the date of first sale (whether in July, August, or thereafter) is material to the overall market opportunity, given the expected time it will take for provinces to ramp up recreational infrastructure,” says Bottomley in an industry update to clients on March 8.

“Looking ahead, we believe that sector multiple expansion could resume in the near term as we await positive catalysts such as the announcement of rec purchase commitments from Ontario, progress towards federal legalization, the potential for further consolidation and M&A, and the potential entrance of strategic partners in the space,” says Bottomley.

As to when the next slowdown in the sector might come around, Bottomley thinks it’ll be when the “rubber hits the road” and the roll-out of adult rec cannabis actually occurs.

The analyst claims that not until the federal government gets a clear regulatory frame in place will investors be able to pick the standouts among the large number of contenders within the cannabis space.

“I think that what’s going to happen is the government is going to make sure that they don’t price themselves out of the market,” he said in conversation with BNN in February. “I think the two main factors they’ll be concerned with are public safety and restricting access to youth.”

“The market right now is defining itself so it’s hard to know exactly where the value drivers are
going to be until regulations come out and give more clarity about the market,” he said. “So, once you see the ins and outs of what cultivators and distributors are going to be able to do, it’ll
be an easier decision to place your bets. There will be winners and losers in this market, to be
sure, and regulations will help determine that,” says Bottomley.