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Weed stocks on fire

Reports that Ottawa plans to legalize marijuana by July 2018 sends investors into a frenzy

Weed stocks soar on legalization news

Marijuana stocks rallied this morning in reaction to exclusive news that the Liberal government plans to legalize weed by July 1, 2018.

The stock of Canada’s biggest medical marijuana producer, Canopy Growth Corporation (TSE:WEED) shot up more than 10 percent in value within minutes of the opening bell. As of noon today, WEED was worth $10.88, up $1 from last Friday.

Ontario-based Aphria Inc. (TSE:APH), another large-scale cannabis producer gained 36 cents per share in early morning trading, up six percent from a week ago, while Vancouver-based Aurora Cannabis (CVE:ACB) climbed a healthy 10 percent in value, bringing its stock to $2.50 per share.  

Late Sunday evening, CBC News reported that legislation to legalize marijuana will be announced during the week of April 10, and will “broadly follow the recommendations” of last year’s marijuana task force report, which was a fairly progressive assessment of the benefits of legalizing weed for recreational use across Canada.

“I think late last year, market participants were under the illusion that the legalization would be all wrapped up with a bow by this spring, and selling (recreational weed for) adult use (would begin) by January 2018,” wrote long-time weed analyst Chris Damas of The BCMI Report, in his morning note.

Damas is bearish on weed stocks, frequently arguing that their valuations are a product of hype, and not a reflection of the fundamentals of the cannabis industry. “Licensed marijuana producers are in the midst of expanding their capacity and there will be a huge amount of excess cannabis if Canada delays legalization,” Damas told Bloomberg News earlier this month.

Industry players, however, are optimistic about the Liberal government’s latest timeline.

“I think it’s extremely positive for any cannabis company in Canada, because it increases the certainty that the government is committed to the recreational market,” Marc Lustig, CEO of CannaRoyalty told VICE Money. Lustig’s company, whose stock has gained almost 20 percent in the last week, invests in the marijuana space, and stands to profit handsomely from legalization, partly because of a royalty agreement it has struck with cannabis producer Aphria.

“We own the intellectual property on marijuana products like edibles, skincare etc. When Aphria starts selling our products in the recreational market, we will receive royalty on those sales,” said Lustig.

Licensed cannabis producers have raised hundreds of millions of dollars in this past six months, says venture capitalist Michael Miller, whose company, Initiative Capital, hunts out and pumps money into startups related to the weed industry. “The implication of this news is that the regulators will have to commit additional resources to ensure there is enough safe adult use cannabis to meet the demand at the time of legalization.”

Weed stocks have soared since last November, fuelled by optimism about the potential of the recreational sales market. According to the “Toward the Legalization, Regulation and Restriction of Access to Marijuana” report published by the Canadian government, weed is the most trafficked drug in the world. The illegal marijuana market in Canada brings in a whopping $7 billion in annual income for organized crime — that’s more or less the amount that licensed cannabis producers stand to gain from the legalization of weed for recreational use.

A recent report by James West, author of the investment research report Midas Letter, suggests that police raids on illegal weed dispensaries across Canada were in part, motivated by pressure from licensed medical marijuana operators who are unhappy that these illegal pop-up weed shops might be eating into their profits.

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