By Ciara Linnane, MarketWatch
Canadian cannabis companies should be celebrating the first anniversary of legalized marijuana on Thursday, but the party atmosphere has been tainted by a sharp three-month selloff that has seen many companies surrender half their value or more.
Concerns about a lack of profit in the sector have sparked a massive re-rating of risk that appeared to peak last week after a revenue warning from Hexo Corp. /zigman2/quotes/206508254/composite HEXO +0.75% /zigman2/quotes/200008967/delayed CA:HEXO +3.19% that reminded investors that the much-hoped for returns that sent stocks to record levels earlier this year were not materializing.
The Canadian market is still grappling with a severe shortage of retail outlets that has hampered the development of the legal pot market and allowed the black market to remain dominant, according to analysts and investors. Just last week, Statistics Canada released crowdsourced price data for the black and legal markets and found an average legal price in the third quarter of C$10.23 a gram, almost double the black market average price of C$5.59 a gram.
“What the government has done is instituted a lot of red tape, in particular at the retail level, which is making It extremely challenging for licensed producers to roll out product efficiently,” said Greg McLeish, analyst at Mackie Research Capital.
“What the rules and regulations and red tape are doing is to create what I consider to be a new form of prohibition,” McLeish told MarketWatch in a phone interview.
Jason Wilson, partner in the ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ +2.84% , agreed that the lack of a retail footprint is an obstacle.
Wilson estimated there are currently about 500 stores in all of Canada. By comparison, in the U.S., Denver alone has nearly 400 total dispensaries, including medical and recreational.
“It’s hard to get product out and to market it effectively [in Canada],” he said by phone.
The first year of cannabis only allowed for flower and oils to be sold, with the launch of edibles and derivatives expected to start in December. “But even with Cannabis 2.0, nothing will change immediately as a Canopy Growth /zigman2/quotes/200603886/composite CGC +5.73% /zigman2/quotes/202205609/delayed CA:WEED +6.82% or an Aurora /zigman2/quotes/210559470/composite ACB +6.54% /zigman2/quotes/203734337/delayed CA:ACB +6.60% that wants to market a product will have to register with Health Canada and give 60 days notice. Without that opportunity to market a wide selection of products, it will continue to be harder to compete with the black market,” said Wilson.
Here's how to invest in cannabis through ETFs
Investing in marijuana or cannabis stocks can be risky. Small companies that are actually handling and growing marijuana might not be legal at a federal level. Here's what you need to know.
In some ways, the government is treating the sector as if it were still illicit, said McLeish. Cannabis companies are not allowed to advertise, online customers are obliged to sign in and confirm they are over 19 and medical cannabis is the only medicine in Canada that is taxed, he said.
“Alcohol companies can advertise freely, their sites don’t have age confirmation and they have great distribution, even though marijuana is safer in every way than alcohol. Again, it’s down to government interference, and my concern is that Canada will lose its leading position because of government dithering and red tape,” he said.
The sector has also suffered from corporate governance scandals at companies like CannTrust , which has had its reputation — and stock price — battered by a scandal involving illegal grow rooms that led to the ouster of its CEO and suspension of licenses.