Canadian marijuana stocks surged on Tuesday after a federal task force released its long-awaited recommendations on the legalization of the drug for recreational use.
The report, ordered by Justin Trudeau's Liberal government, proposed that people over the age of 18 be allowed to carry up to 30 grams of marijuana for recreational purposes. It also recommends restrictions on advertising and how and where the product can be sold, and suggests the government move quickly to "increase or create capacity in many areas relating to the production and sale of cannabis."
Some investors viewed the recommendations as a major win for the handful of publicly traded licensed producers in Canada. Stocks such as Aphria Inc., Canopy Growth Corp., Emerald Health Therapeutics Inc. and OrganiGram Holdings closed the day up between 3 and 12 per cent, on heavy trading volume.
The recommendations are the next step toward legalization, which analysts expect to happen in the spring, with recreational pot sales potentially starting in 2018.
While the recommendations give investors a better understanding of what a legal pot market could look like, there's still a lot of speculation and uncertainty, said Ryan Modesto, managing partner at independent research company 5i Research, and valuations of many marijuana companies are high. Canopy, the country's largest marijuana player, trades at a multiple of 46 times revenue.
"We still think it's a bubbly looking industry right now," Mr. Modesto said. "It's tough to justify the multiples these shares are trading at."
He also cautioned that the recommendations may not be approved. "While I am sure the government will take them very seriously, it doesn't necessarily mean they have to listen to anything that's there," Mr. Modesto said.
The task force recommended that people be allowed to grow up to four plants of their own, which could put a dent in the marijuana market, as well as calls for increased capacity if the government decides to open the door to more licensed producers. On the other hand, if no or few new producers are licensed by Health Canada, current producers could see a major boost in their business.
Canada currently has 36 producers licensed to grow and distribute marijuana for medical purposes. Canopy, the country's largest marijuana player, owns four of those licences and will have six with its recently proposed acquisition of Mettrum Health Corp.
Canopy shares closed up 8 per cent on Tuesday to $10.79, which is still below its all-time high of $17.86 reached on Nov. 16. Pot stocks soared in mid-November, and then retreated, amid market speculation and after a handful of U.S. states voted to legalize marijuana.
On Tuesday, Aphria shares jumped 5 per cent to $5.34, which was below its high of $7.79 in mid-November. Emerald Health shares closed up 12 per cent to $1.40 and OrganiGram shares ended the day up 3 per cent at $2.05.
Mettrum shares rose nearly 8 per cent to $7.16, which is below its high of $8.25 on Dec. 1. That's when Canopy announced its all-stock deal valuing Mettrum at $8.42 a share, a 42-per-cent premium to its price the day before the announcement.
Bruce Campbell, portfolio manager at StoneCastle Investment Management, a long-time holder of a number of pot stocks, including Canopy and Mettrum, was relieved by the wide-ranging recommendations and market reaction.
"We came into today a little bit nervous," Mr. Campbell said. "You never know how something like this is perceived by the market."
Mr. Campbell didn't make any trades on Tuesday, but said his firm trimmed its position on some marijuana stocks when they hit their highs last month. They also bought back in when the stocks dropped.
Beacon Securities analyst Vahan Ajamian, who just initiated coverage of Canopy with a "buy" rating and $14.50 target and covers Supreme Pharmaceuticals Inc., said proposals from the federal task force "solidify that this is really happening."
Still, he cautions investors that there will be volatility in the sector in the months ahead.
"This is going to play out over years," Mr. Ajamian said. "There is potential for a lot of these companies to do really well here, but investors have to realize that it's not going to be a straight line – as we've seen in the last two or three months – it's going to be volatile and they should be investing funds that they're able to stomach over the long term."
Norman Levine, managing director of Portfolio Management Corp., said investors "should be exceedingly wary" about buying into the sector, especially at current prices.
"To me, this is dot-com all over again, but it's marijuana instead," Mr. Levine said.