Second Chance at “Pot Stock Mania?”

Checking out the Canadian marijuana pitch from Casey's Crisis Investing

By Travis Johnson, Stock Gumshoe, October 30, 2017

This is the headline that so many readers have been asking about in recent weeks…

“URGENT: If you missed America’s ‘pot stock mania,’ here’s your second chance to become a marijuana millionaire. This 58¢ pot stock is set to soar on October 31, 2017, when Canada votes to legalize marijuana for the entire country.”

That’s to get your attention, of course, and to try to convince you to subscribe by the “deadline” of October 31 so you can learn about this secret pot stock — the ad letter is signed by Justin Spittler, selling subscriptions to Casey’s Crisis Investing and a set of marijuana stock recommendations that are presumably coming from the mind of Nick Giambruno, who helms that newsletter.

The bill to legalize recreational marijuana across Canada is indeed in the legislature, after having been loudly proclaimed as a priority of Trudeau’s Liberal government over the past six months, and the generalities seem to have strong public approval… though no one is really sure what will happen when it comes to the specifics as the bill (C-45) makes it through the legislature.

And it seems likely that this bill’s progress is what the teaser pitch “deadline” is attached to — promising that as the formalities are passed, the market will change… though the government has already been pretty open about promising that full recreational legalization is targeted for July of 2018. Presumably it’s still possible to derail or change that legislation in some way (it’s already been delayed beyond what folks had expected earlier this year), and certainly not every legislator approves of the plan, but passage of the detailed law and release of the regulations over the next few months, and a July 2018 deadline for legalization, seems to be the consensus bet.

The bill has been passed by House committee, though not yet voted on by the House of Commons, and after presumed approval in the House (where the liberal party has a strong majority) it will pass on to the Senate, Canada’s rough equivalent to the UK’s House of Lords, which is more independent and could have different priorities (though the Senate is likely less conservative than it was a couple years ago, thanks to a rash of new appointments — in Canada, Senators are appointed as regional representatives, not elected, and effectively serve for life… with a majority of recently-appointed senators being at least nominally non-partisan).

So that’s a long-winded way of saying it’s possible that there will be some votes soon, though not likely tomorrow. The House of Commons is in session for much of the rest of the year, other than a couple holiday breaks, so it could come up for a vote or a third reading at just about any time… though it’s not currently scheduled as far as I can tell.

But, perhaps more importantly, there doesn’t seem to be that much room for a positive catalyst — everyone expects approval, every marijuana speculator is pretty much banking on July 2018 as the day the market opens for legal recreational marijuana, at least to some degree, and that any legislative issues would bring relatively minor delays, not threaten legalization itself.

If everyone is expecting legalization to happen, then a formal bill being approved probably does not change the calculus for investors in companies that they believe will be beneficiaries of recreational marijuana legalization. If it gets pushed out another six months or a year, as some police officials want, or hits other hiccups or includes a different regulatory framework than is expected, there could certainly be a negative catalyst for these stocks… but it’s hard to imagine that current leading Canadian marijuana stocks are priced for anything other than “full recreational use in the near future.”

To further reinforce that point, the Canadian marijuana businesses themselves are continuing to become more mainstream — the biggest grower and distributor of medical marijuana, and the closest thing to a “name brand” in Canadian pot, Canopy Growth, just sold 10% of itself to the giant alcohol multinational Constellation Brands (STZ), so there’s further indication of how much legalization is “baked in.” The distributor of Corona, Manischevitz and Robert Mondavi isn’t betting the farm on marijuana (their investment equals roughly a month worth of profits from their current businesses), but neither is it doing this on a lark, they’re putting up a meaningful $191 million for their stake… mostly, it seems, with the intention of putting themselves in position to provide and distribute marijuana-powered beverages or similar products in a legalized future.

So optimism is high for all the Canadian marijuana stocks right now, with a widespread assumption that legalization comes next summer, and that “supplies will be tight” as soon as legalization happens. We don’t know what the details are, or what price controls might exist on recreational marijuana, but dreamers are dreaming big.

And, of course, it would be delightful to get in early on something that really does become a sustainable and profitable business, or that’s going to grow much more dramatically than expected. I’ve avoided the marijuana sector, for the most part, because most of the stocks that I’ve seen don’t have a clear path to being reasonably valued based on any kind of assessment I can make about their future sales… and because I’ve only seen one marijuana stock, Canopy Growth, that had anything approaching a brand that could become premium-priced and valuable in what otherwise looks like a market that could easily be commoditized — Canopy is the only one I’ve seriously considered buying, because of that brand strength, but I’ve never talked myself into accepting the market valuation.

But that’s just me — I write about lots of things that I can’t talk myself into buying personally, so let’s see if we can ID the stocks that the Casey folks are pitching for Canadian marijuana legalization.

More from the ad:

“October 31, 2017 will mark the biggest event in the history of marijuana profits.

“Because, on that day, experts predict that Canada will legalize marijuana across the entire country.

“That move will unleash an $8 billion industry overnight.

“Turning hundreds of everyday folks into Marijuana Millionaires.”

Again, seems a little over the top — none of this is “overnight” and legalization has been promised by the government since earlier this year and expected for longer.

The ad also includes a big graph showing how Canada’s marijuana opportunity is 7X larger than the United States, presumably because the states that have legalized marijuana are one seventh the size of Canada. They use that “7X larger” pitch to say that the stock market mania for Canadian marijuana stocks should be seven times bigger than the crazy 1,000% moves we saw from US penny stocks during the past state-legalization votes… which, you can hopefully see already, is silly.

It is technically true, I’ll stipulate, that Canada’s land mass is something like seven times larger than the land masses of the states that have approved recreational marijuana. It’s a gigantic country… it’s just that no one lives in most of it. California, one of the states that has legalized both medical and recreational marijuana, has both a larger population and a larger economy than Canada… albeit in a much smaller space. Recreational marijuana legalization in California is quite likely to create a larger market than the Canadian cannabis market eventually, though the fact that marijuana remains illegal and tightly controlled at the Federal level in the US keeps that economic impact from emerging… big companies like Constellation Brands certainly won’t risk buying into recreational marijuana operations in Colorado or California as long as that business is illegal (and at risk of Federal backlash) in the US.

So what’s the big reason for profits? The huge shortage that is seen as emerging when legalization happens in Canada…