With America Stuck in Prohibition, Canada Goes Full Legal on Pot

With America Stuck in Prohibition, Canada Goes Full Legal on Pot
With America Stuck in Prohibition, Canada Goes Full Legal on Pot

  • Recreational pot sales start Oct. 17, but supplies are scant as few approved locations open in time
  • The new market favors a lucky handful of already-rich Canadian MJ companies investors should watch now
  • US growers warn the president that America must reform pot laws soon… or lose billions in capital outflows 
Picture this—it’s Wednesday Oct. 17. The kids are in school, and the adults are out partying. At long last, recreational marijuana is officially legal for sale and sharing all across Canada.
 
The party could be subdued, though. Someone fell down on supplying the goodies. While the government moved with ponderous sloth toward full legalization, it moved even more slowly in approving selling points.
 
In British Columbia, population 4.6 million, for instance, the government has approved exactly one store, in Kamloops. That’s it.
 
Vancouver, the largest city in BC, is a four-hour drive from Kamloops, and Vancouverites will have to wait. The Vancouver Sun reports that the province received 100 private store applications, but it will likely be January before any more stores are open.
 
Rolling Stone reports Montreal will start with 12 stores and have 15 total by the end of the month. If that sounds like largesse, it’s not. According to the Montreal Gazette, 41% of 18-14 year olds are cannabis consumers. Most partake weekly or more often. And Canada’s largest province, Ontario, has zero approved retail stores ready to open yet.
 
Every province and territory sets its own policy, but seemingly none are ready. Except possibly Nova Scotia.
 
Who Wants a Piece of $8.7 Billion?
 
The good news in Nova Scotia, which has the highest percentage of pot smokers, is that the government will provide an online service. And unlike other provinces, it will start out by selling through liquor stores, which makes the process easier.
 
If Canadians adopt legal weed at expected rates, adult sales will rapidly eclipse the current medical-only market. Statistics Canada estimates that 14% of Canadian adults consumed marijuana, even before legalization. And many suspect that figure is far too low. This leaves the country guessing what legal demand will be once everything is in the open. DeLoitte estimates $8.7 billion in cannabis sales.
 
Canadian grower stocks have generously rewarded investors for several years, and that’s not the end of the line. The new adult market means there’s a lot more growth ahead. No one has a list of pot smokers to market to. The new business is just beginning and will grow month-by-month, year-by-year.
 
The obvious sweet spot for investors, though, now lies with the retailers. Three to watch closely are Choom, Aphria, and HEXO.  
 
Several of the existing marijuana businesses have been preparing for the new retail market. Under-the-radar Choom (CSE: CHOO; OTC: CHOOF) may be the most ambitious. Even Aurora Cannabis (TSX:ACB; OTC ACBFF) has invested $7 million in Choom. That’s a valuable endorsement from the second largest company in the business. Choom now has 37,300 sq. ft. of indoor growing space, and it’s on an ambitious building program to surpass 700,000 sq. ft. of indoor and outdoor growing space in the near future. But the most pertinent thing about Choom right now is how advanced its retail strategy is already. 
 
So far, Choom has established 52 retail store locations in Saskatchewan, Alberta and British Columbia. It is also negotiating sites in Manitoba and Ontario. In Manitoba, Choom has applied for a master retail license, which would allow it to open multiple stores there. Choom had hoped to have that license approved by Oct. 17. It will come a bit later than that, but soon.
 
Choom is the most undervalued company to watch now, but several other longtime leaders are moving forward with retail plans as well. HEXO Corp. (OTC: HYYDF; TSX: HEXO), formerly Hydropothecary Corp., made a $10 million investment in Ontario’s Fire and Flower retail store. It also has a deal with Molson-Coor’s to develop a cannabis drink.
 
Aurora Cannabis (TSX: ACB; OTC: ACBFF), will be in the retail business more indirectly. Besides investing in Choom, Aurora will supply recreational marijuana to the market through the Ontario Cannabis Store. Aurora is too overvalued for investment right now, though.
 
Aphria (TSX:APH; OTC: APHQF) also began positioning for this day long ago. It has developed a  portfolio of recreational and premium brands. The company says it is working in house on edibles and will announce a partnership for a cannabis beverage as well. In the meantime, it has partnered with Southern Glazer as the exclusive MJ supplier. Southern Glazer may not be a well-known name to many investors but it is North America’s largest wine and spirits distributor with operations in every Canadian province and 44 U.S. states.

Investors who want to capitalize on the retail industry should probably look at these early movers, Aphria, HEXO, and Choom, soon. They may prove to be rare birds. Terry Lake, VP at HEXO says, “I don't think you need to fear licensed producers taking over the industry. You can put restrictions on ownership, as Alberta has.” Alberta will not grant more than 15% of the province’s licenses to any single company.

Across all of Canada, probably only 200 outlets will be ready for retail sales on Legalization Day. But several online channels should be open. Ontario and BC, for instance, have chosen Shopify to handle their online sales. They’re confident Oct. 17 won’t crash the system. Shopify handles high traffic smoothly.

Online sales are not a threat to retail stores at all. In fact, sellers operating from actual storefronts enjoy some advantages. A retailer with a street presence can not only capture all walk-in sales, but serve as a branding and constant advertiser for its own products online.

The US Looks On, Still Locked Out

Canada’s marijuana industry is putting a lot of pressure on politicians in the US where federal laws still criminalize marijuana. The marijuana community has been expecting federal legislation to change for a long time, but suddenly the chances are strong.

At the top, President Trump has promised Rep. Dana Rohrabacher (R-CA) that he will pursue federal legalization after the midterm elections.

Democrat Sen. Charles Schumer (NY) is also sponsoring a bill to funnel millions into research on marijuana initiatives related to public safety, public health, and arrests.

A few months ago, that bill stood little chance of making it out of the House. But midterm elections favor a change in control, and with Democrats in charge of the House, marijuana will be among friends.

In addition to a very probable Democratic House of Representatives after the election, current US Attorney General Jeff Sessions is also likely to be on the way out. Sessions is stridently anti-marijuana and has instructed Justice Department prosecutors to pursue all charges against anyone caught as aggressively as possible. But President Trump has been unhappy with the staunch anti-pot enforcer for a long time. Sessions days are surely numbered once elections are over.

Old Foes Befriend MJ—It’s All About the Money

Republicans in general have been slower than Democrats to embrace marijuana, but that has changed. Former Speaker of the House John Boehner, a staunch Republican, now serves on the board as an advisor to Acreage Holdings, a US grower. And super-conservative industrialist and political kingmaker Charles Koch believes that decriminalizing pot could be a weapon in the war against opioids.

Political pressure is high, but money matters, too. On Oct. 16, the day before pot went legal in Canada, Terra Tech, a US grower, took out a full-page ad in the Wall Street Journal to urge the president to legalize pot . he ad noted that MJ is legal in some form in 31 states but because of federal laws this rich business must look to Canada for capital and access to public markets. In fact, the Canadians are doing so well, they are rich enough to take over the US industry, too, the ad claims.

And the lure of legal pot right across the border is sure to be strong, no matter what the laws declare.

Transporting marijuana across the Canadian-US border is illegal. The US border patrol is adamant on the point. The Windsor Star recently reported that “U.S federal authorities quietly tweaked a rule stating that anyone involved in the marijuana industry, including Aphria’s investors and its almost 500 workers, were to be treated no differently than drug traffickers.” The embarrassed agency backed off its extremism, and decided these undesirables could enter the US. But only if they were not coming on marijuana business.

The irony on Oct. 17 will be that if  Jeff Sessions wants to keep millions illegals from crossing the border, he should tell the president to shift his long-promised wall to the north, and forget about Mexico

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