Publicly-traded marijuana companies had a rough week but got a bounce Thursday following news of raids at the Cannabis Culture dispensary chain owned by Marc and Jodie Emery.
The outspoken marijuana activists were arrested at Toronto’s Pearson Airport and a series of Cannabis Culture dispensaries, which are not licensed to sell medical marijuana, were raided in Vancouver, Ottawa and Toronto.
Investors may have interpreted the raids as the government attempting to “draw a line” between the kind of operations that will eventually be allowed in the legal recreational market and those that will be forbidden, said an analyst who did not want to be named because he does not follow dispensaries.
“Once there’s a line drawn, they’re going to crack down significantly harder on whoever is out,” he said.
A task force report on legalization has recommended the government allow storefront locations in addition to the current mail-order system for medical marijuana and acknowledged a majority of people who participated in the consultation process prefer a distribution system that includes dispensaries. But for now, they remain illegal.
Shares of licensed Canadian medical marijuana providers rose alongside news of the raids, with Canopy Growth Corp. closing nearly six per cent higher at $11.07, Aphria Inc. up six per cent to close at $6.67 and Aurora Cannabis Inc. rising six per cent to close at $2.41 Thursday on the Toronto Stock Exchange.
Pot stocks rebounded after being hammered by a bout of bad news for the fledgling industry.
Developments included two class-action lawsuits filed against Canadian companies and statements by Canada’s point man on marijuana, Bill Blair, suggesting the legalization roll-out would not be rushed.
Many investors had been pricing in the impact of the coming legal recreational market to medical marijuana stock valuations, expecting that demand for their product is set to grow immensely and immediately.
“These Canadian stocks are a huge battleground for traders and investors right now,” said Alan Brochstein, founding partner at New Cannabis Ventures.
“I don’t think there was any sort of change that was communicated there (by Blair) but it was maybe it was a wake-up call to people who don’t understand the process,” he said.
“I think there are a large number of people trading these stocks that don’t understand the timeline very well. Traders and investors get excited without really understanding these delays and lags.”
However, a lag could open the current licensed producers to more competition, eroding their first-mover advantage.
He said stocks were also punished after two class action lawsuits, which could result in liabilities and “just makes the system look bad.” Mettrum Ltd., which was acquired by Canopy, and Organigram were both hit with class action lawsuits this week from patients who ingested tainted marijuana after their products were found to contain unauthorized chemicals.
Vahan Ajamin, an analyst at Beacon Securities, said he still expects legislation to be introduced this spring and regulations to be fast-tracked at the federal level so the market will be in effect ahead of the next federal election in 2019.
“I think everybody wants to see this live for at least six months if not a full year before then.”