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2 Pot Stocks To Watch As Canada Legalizes Marijuana

Published 06/22/2018, 05:44 AM
Updated 07/09/2023, 06:31 AM

Major news out of Canada this week brought renewed attention to the legal marijuana industry, with the North American nation becoming just the second country in the world to legalize a statewide recreational cannabis market.

The decision came by way of a 52-29 vote on Bill C-45, also known as the “Cannabis Act.” Bill C-45 faced a lengthy legislative process, having first been introduced in April 2017 and passing through the House of Commons in November before being approved by the Senate on Tuesday.

The federal government has passed the basic framework of Canada’s legal pot industry, establishing the minimum age for consumption at 18 years and limiting plant cultivation to four per home, per adult. From here, the provinces and territories will work on their own specific laws regarding distribution and additional regulation.

Canada has been operating a medical marijuana industry for several years now, and the nation has emerged as the top destination for investors looking to buy stocks with exposure to the cannabis business. Many Canadian medical marijuana companies trade on their domestic exchanges, and some have been available on over-the-counter markets in the U.S.

More recently, a pair of Canada’s largest marijuana companies—Cronos Group (TO:CRON) and Canopy Growth Corp. (AX:CGC) —have made their way to U.S. exchanges.

Cronos Group became the first pure-play medical marijuana company to list on an American exchange when it debuted on the Nasdaq in late February. The firm invests in companies that are licensed to produce and sell medical-grade pot.

Meanwhile, Canopy Growth became the first cannabis producer on the NYSE when it listed on the historic exchange late last month. Canopy Growth is an actual cultivator of marijuana. It holds multiple licenses and is geographically diverse, owning subsidiaries and forming partnerships in countries like Spain, Germany, Denmark, and more.

Here’s a look at how CRON and CGC have traded over the past three months:

(Note: CGC’s performance extends before its NYSE debut by including data from when it traded OTC).

Obviously it has been a tale of very different stocks here recently, and both companies experienced significant volatility on Friday—CRON fell 5.7% and CGC dropped 8.9%—but that is not necessarily the whole story when it comes to these investment options.

With Canada’s legalization initiative yet to be officially implemented, there is still near-term uncertainty at play, and we hardly know much about how each company plans to transition to the legal pot business—which, if we might add, presents its own unique business risks.

Still, we can guess that Cronos and Canopy Growth have been preparing for this moment. As mentioned, CGC has worked to scale out internationally and should have the tools necessary to handle fresh demand. At the same time, Cronos has added capacity to certain greenhouses and expects its total production capacity to expand by 600% from last year’s total as early as 2019.

In other words, these are not clear-cut stocks to buy on the back of Canadian legalization, but they are certainly stocks to watch and will likely emerge as two of the most popular options in this space.

We should note that CRON has a Zacks Rank #3 (Hold) based on the earnings estimate activity of two covering analysts, while CGC is not yet covered and has no Zacks Rank—although that should change soon.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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Cronos Group Inc. (CRON): Free Stock Analysis Report

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