Are Canadian Marijuana Stocks Poised for a Comeback in 2020?

Canadian Marijuana Stocks Surge?

This has not been an easy year for marijuana stocks—especially for pot stocks operating in Canada exclusively. While still the first major economy to legalize marijuana for all uses, Canada has since fallen behind in terms of marijuana industry excitement (which, to be fair, makes sense—Canada is a relatively smaller market). But it does appear that the tide is beginning to turn as Canadian marijuana stocks begin a rally that could blossom into something far greater down the line.

To understand the opportunity in the Canadian marijuana market, however, you have to first understand the current state of the broader pot market.

The COVID-19-pandemic-addled economy has been less than kind to many industries across the board, but pot has been especially hard hit.

While tech and other emergent industries have been able to thrive in the pandemic due to a number of factors (not the least of which being that the “new normal” is shifting us towards greater tech reliance), the sudden disappearance of huge swaths of wealth and economic activity in certain instances have meant that others were not so lucky.

The pot industry was just hitting its stride, too, as the pandemic hit. Yes, it had hiccups both major and minor along the way, but there was growing momentum building towards U.S. marijuana legalization. The excitement surrounding that development alone would be enough to spur huge gains among pot stocks.

But the pandemic infected that process as well, slowing it or in some instances totally halting pot legalization talks as (understandably) politicians turned their attention towards bigger fish.

With sales failing to meet expectations in the immediate aftermath of Canadian legalization (largely caused by the continued presence of a robust black market) and faltering marijuana progress in the U.S., the Canadian pot market was particularly vulnerable to an economic upheaval. And the pandemic delivered exactly that: a financial upend the likes of which we hadn’t seen in about a century.

So 2020 did not, it’s safe to say, get off to a hot start for marijuana stocks, especially those in Canada.

But things are starting to look up for the beleaguered sector.

Chart courtesy of StockCharts.com

A spate of recent stats have shown that Canadian marijuana sales are on the up.

In July, licensed marijuana stores sold more than $231.0 million in product, representing a 15% increase from June’s sales. The jump marked the biggest monthly increase since the country legalized cannabis, according to data from Statistics Canada. (Source: “COVID-19 pandemic a ‘boon’ for legal cannabis in Canada as marijuana industry turns two,” Global News, October 17, 2020.)

Statistics Canada data also shows that, compared to April-June 2019, people spent 74% more money on licensed cannabis in the same time period this year, which is just after the World Health Organization declared a coronavirus pandemic. The decrease in spending on the black market in the same time frame is less than five percent. (Source: Ibid.)

There are a number of reasons for this increase, no doubt, but this is exactly what I had been predicting since the start of the pandemic: that we’d see an increase in marijuana use, not unlike how alcohol use goes up in economic downturns.

While it’s not something you want to celebrate, the fact that people are either working from home or dealing with job loss and coping with the lockdown in general is no doubt playing a role in the increase in marijuana use. Again, this is something that I saw coming and wrote about at the onset of the pandemic.

Another boon for legal pot in the pandemic is that people are finally beginning to to turn to brick-and-mortar storefronts for their marijuana.

After all, with a highly infectious virus merrily globetrotting from country to country, causing huge outbreaks and turmoil wherever it lands, it only makes sense that people would rather buy from a distributor who has a, you know, license and pays taxes rather than a guy whose only qualifications are that you met him at a party one time and he seemed legit.

This pandemic may, in the long-run, actually benefit Canadian marijuana stocks greatly by serving to accelerate the conversion from the black market (which has been established in Canada and across the globe for decades) into the newborn legal market.

It also doesn’t hurt that more brick-and-mortar locations are cropping up. As storefront density increases (and thereby convenience for buyers increases), it’s only a matter of time before it simply becomes easier to buy legal than not.

Ontario now has more than 180 licensed cannabis stores. That number will continue to grow, as the province recently greenlit the opening of 40 stores per month, which is double what it did before, according to the Alcohol and Gaming Commission of Ontario, which is responsible for regulating Ontario’s marijuana retail stores. (Source: Ibid.)

Another huge selling point is that the price of legal weed is finally, mercifully, falling.

One of the huge problems at the outset of the legal marijuana industry in Canada (and this extends south of the border as well) is that legal pot is too damned expensive. Or should I say was too damned expensive.

Now that prices are falling, consumers are going to be far more likely to purchase legal weed than opt for the black market, the main competitive advantage of which had always been price (as black market dealers don’t have the high overhead costs of taxes, licensing fees, etc.).

Consider that when Canada first legalized recreational marijuana, the average price per gram for legal pot was CAD$10.25, while the black market sold it for four dollars less, on average. The Ontario Cannabis Store released a recent pricing comparison showing that, near the beginning of the year, the average price per gram for legal dried flower on its site was CAD$7.05, including taxes, almost a whole dollar cheaper than illegal mail-order sites.

The future, in other words, is looking up for Canadian marijuana stocks. What’s more, we’re already seeing a healthy rally for several of our top pot stocks, as seen in the chart above.

Analyst Take

With Canadian marijuana stocks already surging while sales numbers are coming back better than ever, we again have a lot of reasons to be excited about the pot industry moving forward.

What’s more, as the pandemic ends and we begin to see U.S. marijuana legalization talks rekindle, we can expect potentially huge gains in the near future for marijuana stocks.