Canada’s pot companies miss the best party

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Canadian marijuana companies started out with big advantages over American ones, thanks to a fully legal domestic market. From now on, the slowness of American legalization risks turning them into spectators.

Cannabis stocks have been on the decline for seven months as cannabis changes stagnate in Washington. Recent Democratic proposals for a legal overhaul are seen as too ambitious to pass. Counterintuitively, this hit Canadian names the hardest as they were shut out of the burgeoning US marijuana market until the federal ban ended.

After a wild party earlier this year when Democrats took control of the US Senate, shares of Canada’s most valuable publicly traded cannabis company, Canopy Growth CGC -2.15%

have declined by about two-thirds since mid-February. Another big name, Cronos Group,

CRON -1.79%

has more than halved.

The country’s pot growers are eager to expand south of the border, where data provider Headset expects the legal cannabis market to be more than five times larger than at home by the end. from 2022.

Thursday, Canadian producer Tilray TLRY -4.81%

said plans to raise revenue to $ 4 billion by the end of its 2024 fiscal year are heavily dependent on being able to sell to American smokers. The company reported a 43% increase in sales for the three months to August compared to the same period of 2020. While this looks impressive, it was lower than analysts expected, indicating a slowdown in Canada .

At this time, Canadians cannot buy any American marijuana company that “touches the plantâ€. But they can sign agreements that will be triggered if and when federal laws change. Tilray recently bought an option on bonds convertible to 21% of the shares of US grower MedMen.

Canopy has similar substitution agreements with two US producers. These are potentially risky deals: no one knows what shape American companies will be in when the drug becomes fully legal.

Meanwhile, business is toughening up in Canada where an overabundance of licenses has resulted in overproduction. Indoor cultivation now covers 18.7 million square feet, enough to meet 200% of the country’s demand, according to a recent report from broker Stifel. Over 500 marijuana companies are now vying for market share, making it harder for Canada’s high-loss cannabis companies to become profitable.

Even if the US federal ban is lifted earlier than expected, it won’t be good news for Canopy and Tilray. Canadian cannabis stocks trade at a high premium, mainly because they are permitted to be listed on the US stock exchanges. Their American rivals are forced by the federal ban to exploit instead the less liquid Canadian market.

But valuations are likely to rise if cannabis reform allows U.S. pot companies to bring their inventory home, according to Andrew Carter, an analyst at Stifel. This could make the purchase of US assets much more expensive for Canadians.

Canadian producers are eager to talk about the opportunities that await them in the United States. Unfortunately for investors, they could be left on the sidelines for a long time.

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Write to Carol Ryan at [email protected]

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