Five Takeaways From Marijuana’s First Day of Sales in Canada
This is individual research and does not constitute investment advice.
A new industry has been born.
Canadians waited patiently in line for hours.
History was made multiple times over… because it wasn’t midnight all at once across the country.
And now legal sales of adult-use cannabis are ringing the registers in Canada.
But as we’ve stated here so many times before: This is just the beginning.
That means a lot of investors need to prepare themselves. I highlighted one important change coming in mergers and acquisitions earlier this week.
But now that you have your Saturday morning coffee in hand, we want to share our five takeaways from pot’s big day…
No. 1: Amazon Effect on Pot
No more pagers.
No more contacts listed as “Not My Drug Dealer.”
With adult-use sales now live, Canadians can freely walk into a store and purchase whatever strain of marijuana strikes their fancy…
Well, sort of…
One of the first things most cannabis investors overlook is that legal pot is just like everything else… Brick-and-mortar (BAM) stores are still dead.
Though, at this point in Canada, only a few BAMs exist anyway.
In fact, due to the simple fact that there aren’t many physical stores, the majority of sales will come through online portals.
In Toronto, Ontario – Canada’s most populous city – the first physical dispensaries won’t open until April 2019.
In British Columbia, there’s only one. And it’s 220 miles from the province’s largest city, Vancouver.
To the east, Newfoundland and Labrador have almost two dozen retail shops. And they were the first to reach 12:01 a.m. on Wednesday morning and begin legal sales.
This is where Canopy Growth Corp. (NYSE: CGC) CEO Bruce Linton was part of history. Linton actually worked the register at one of the company’s Tweed shops to sell the first grams of legal weed to citizens Ian Power and Nikki Rose.
No. 2: Demand Is High for Highs
Even though there’s a lack of physical locales, demand is robust.
At the small number of BAMs, queues were hundreds long.
In the digital world, though, the “lines” were more than 10 times that.
Government-operated sales portals went live across Canada’s provinces at their respective strokes of midnight. And in Alberta, the Alberta Gaming, Liquor and Cannabis Commission’s (AGLC) platform crashed under the weight of massive traffic just minutes after opening.
There were more than 11,000 people waiting to make a purchase on the AGLC site. And the portal processed more than 1,000 orders in the first hour.
Of course, such robust volume led to what many of us expected during the first days of recreational sales…
In British Columbia, popular strains of dried flower had already sold out on Wednesday morning. Blue Dream, Tangerine Dream, All Kush, Kinky Kush, Temple, Banana Split and Moon – and more – were gone.
As were six of the 24 cannabis oil products that were for sale on the AGLC website.
No. 3: Look Out Below!
“Buy the rumor, sell the news.”
We saw this market adage in action earlier this year when Canada’s Parliament finally passed Bill C-45.
Pot stocks rallied hard on the news… then sold off.
We entered a bleak dead-air period where the markets were forced to wait for October 17 for those first recreational sales to begin.
In mid-August, the cannabis indexes hit their year-to-date lows. Then they skyrocketed higher, setting new all-time highs.
But this maxim is in play once again. And we’ll use Canopy Growth’s shares as a proxy for what to watch for.
From August 14 to October 15, shares of Canopy gained more than 131%…
They’ve since buckled, but technical analysis gives us some insight into where shares may fall.
Back in June, shares of Canopy hit a new-all time high on C-45’s passage. They then slipped 26% to their 50-day moving average, which was also the lower band of the Bollinger Bands® volatility range.
After topping out and setting a new all-time high of $59.25 on the morning of October 16, shares of Canopy have been in free fall.
And on October 17 – the day of those first legal adult-use sales – they slid to $48.30.
An 18.5% drop!
Canopy’s 50-day moving average, as well as the lower band of the Bollinger, is $45.06. That would represent a 24% drop from that all-time high hit on the morning of October 17.
That’s the level investors want to watch.
Don’t get me wrong… I don’t believe this is a bubble bursting. It’s just normalizing after a big run-up.
No. 4: Good News for Illegal Sales Too?
Pot is legal. But now Canadians face a new problem.
Demand is outpacing supply.
Producers have been working to expand operations to meet consumer demand leading up to pot’s big day. But they still have some ways to go.
In the past few days, there have been numerous reports of sellers running out of inventory… just hours after legalization.
But as Aphria (OTC: APHQF) CEO Vic Neufeld has acknowledged, while supply chain issues are an industrywide problem, they’re temporary.
It may take the industry several months to work out its shortage woes… but it does leave a gap for the illegal cannabis market to step in.
In fact, it’s a phenomenon we’ve seen here in the U.S. too, in states like Colorado and California.
So even after pot’s big day, the illicit cannabis market should continue to have legs… for now.
No. 5: Another “Green Chip” Joins the Ranks
This week, the New York Stock Exchange will add another major cannabis company to its roster.
Aurora Cannabis (OTC: ACBFF) will begin trading under the ticker “ACB” this coming Tuesday, making it the second billion-dollar cannabis stock to get a listing on the exchange.
But it’s more than a minor change. Getting a listing on a major U.S. stock exchange is often a key signal to both institutional and serious individual investors. It’s a sign of legitimacy and maturity.
More importantly, it can be a catalyst for greater trading volume for the stock.
Let’s take Canopy Growth Corp. as an example…
When Canopy was listed on the New York Stock Exchange on May 24 of this year, its average three-month trading volume sat at about 1 million shares per day.
Today, trading volume is nearly tenfold what it was – about 9.9 million shares per day.
I expect to see a similar surge in investor demand after the listing, which could also hand current investors a nice lift in share prices moving into the next several months.
On that note, investors who own shares of Aurora under its over-the-counter ticker should see their holdings changed to the new ticker automatically in their brokerage accounts.
So there’s no need to purchase the new shares in exchange for the old.
Matthew and Anthony