The clock is ticking.
Thursday should be one of the most important dates for the Canadian marijuana industry ever. The Canadian House of Commons has already passed bill C-45, to legalize the use and purchase of recreational marijuana by adults in Canada. On Thursday, the Canadian Senate is scheduled to vote on it.
Legalization of recreational marijuana would open up a huge new market for companies including Canopy Growth (NYSE: CGC), Aurora Cannabis (NASDAQOTH: ACBFF), and Aphria (NASDAQOTH: APHQF). How will these and other Canadian marijuana stocks respond to the Senate vote? Here are three potential scenarios.
Scenario No. 1: A big bounce
The conventional wisdom is that the Canadian Senate will easily pass bill C-45 and that marijuana stocks will enjoy a nice bounce as a result. Let’s look at both components of this theory.
First, Senate passage of C-45 seems very likely. The initial vote held in March to advance the bill to committee review was 44-29. Although it’s possible (and perhaps even probable) that there won’t be as many votes for passing the legislation on Thursday, the odds appear to be quite good that C-45 sails through.
But will Canadian marijuana stocks soar the next day if the Senate votes for the bill? Maybe. Canopy Growth stock jumped 7% after the vote in March; Aurora Cannabis stock gained around 6%. Other major Canadian marijuana stocks moved higher, although only in the low-single-digit percentages.
Whenever risk for a stock decreases, its price is likely to rise. That’s what happened for Canadian marijuana stocks with the March Senate vote. There’s a solid argument to be made that even larger gains should be in store later this week since the risk that recreational marijuana won’t be legalized will be much lower after the vote on Thursday — assuming C-45 passes, of course.
Scenario No. 2: A fizzle
Another potential scenario, however, is that the Senate votes in favor of C-45 and marijuana stocks barely budge, or even dip a little. Why might this happen? I think there are three main reasons.
First, the anticipation of the legalization of recreational marijuana is already largely factored into stock prices. Canopy Growth, Aurora Cannabis, and Aphria trade at astronomic multiples of their current sales. Even solid prospects for increased medical marijuana revenue in Canada don’t come close to justifying these stocks’ valuations.
Second, several amendments have been added to bill C-45 that make it less attractive to the marijuana industry than it might have been. One of these amendments prohibits promotional items branded by marijuana businesses, including hats and T-shirts. That might not seem like a big deal, but banning swag could hurt sales of recreational marijuana.
Third, investors sometimes “buy the rumor and sell the news.” We’ve already seen Canopy Growth and Aphria post nice gains over the last month. Aurora hasn’t moved much higher, but that’s probably due mainly to its acquisition of MedReleaf. Some recent buyers might decide to take some profits off the table if the Senate passes C-45. If there’s enough selling pressure, it will cause Canadian marijuana stocks to decline at least a little.
Scenario No. 3: A shocking plunge
This last one would be the most shocking: a vote by the Canadian Senate to reject bill C-45. If that happens on Thursday, we’ll see a black Friday like never before for Canadian marijuana stocks.
I think this outcome is by far the most unlikely. It would require all members of the Conservative Party in the Canadian Senate to vote against the bill, in addition to a sizable chunk of Independent senators joining them. Based on the initial vote to advance C-45 to committee and other votes on amendments to the bill, I don’t see this story unfolding.
Could marijuana stocks plunge even if bill C-45 passes? It’s possible.
The best chance for this to occur would be if the vote was much closer than expected in favor of the legislation. Because the Senate has attached amendments to the bill, it will have to go back to the House of Commons for another vote. If the House of Commons rejects any of the amendments, bill C-45 would then go back to the Senate for another vote. A close vote on Thursday could increase the chances that the legislation is derailed along the way, a prospect that would make investors in Canadian marijuana stocks very nervous.
What’s most likely to happen
My hunch is that the second scenario is probably the most likely. I expect the bill to pass easily. However, I’m not looking for a huge bounce for marijuana stocks.
Had no amendments been attached to the bill, my opinion would be different. The amendments, though, mean that there’s still some uncertainty in the legislative process.
There is a chance, however, that we could see a combination of scenario No. 1 and scenario No. 2. It wouldn’t be too surprising if Canopy Growth, Aphria, and perhaps Aurora Cannabis stocks jump appreciably, while others don’t. The big players are in a much better position to profit from the recreational cannabis market, so it would make sense if these stocks move higher while the stocks of smaller players don’t.
I wouldn’t count on making quick gains from the upcoming vote. Regardless of the stock, it’s better to have a long-term perspective — for both potential rewards and potential risks.
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