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The State of Cannabis in 2019–A Look Back and Ahead

The cannabis sector had a runaway year in 2018, but will it remain a good financial risk in 2019? 2018 actually saw stocks take a decline overall, although individual companies had haymaking moments. The first big gamechanger in 2019 may be the shift underway with Aphria Inc., a Canadian pot producer that was first swamped by short sellers then subject to a hostile takeover bid.

Now, however, the chances of a sellout are slim, since Aphria’s first-quarter results were much higher than anticipated, and stock prices continue to climb. Green Growth’s offer, which was valued at $2.8 billion (US$2.1 billion) at the time, is no longer likely to be accepted, Meanwhile, the former company run by Aphria’s new chairman settled charges with the SEC in December, clearing the deck for new growth and a clean slate.

In other cannabis-related news, former U.S. Attorney General Jeff Sessions had hamstrung the cannabis market in early 2018, and Canada’s recreational market was still a – dare we say – pipe dream hinging on campaign promises. However, pot stocks were trading well above current levels, and events throughout the rest of the year set the stage for the coming months.

  • The legalization of medical marijuana swept across the globe, reaching over 40 countries
  • Recreational use expanded rapidly as well, both in various countries and across the United States
  • Legitimization exploded, as traditional consumer and pharmaceutical companies began investing in or partnering with cannabis firms.
  • Cannabis-related trade listings jumped significantly, especially in Canada where 149 companies worth a combined $54.7 billion were actively trading on Canadian stock exchanges on January 2nd. In the United States, firms had a combined market value in excess of $1 billion.
  • Stock performance was volatile in 2018, with many stocks climbing quickly then crashing hard and swinging wildly between gains and losses.

 

hand with gloves holding cannabis plant

The outlook for 2019 is mostly positive, however. News from the United States will increase, as Canada continues working out kinks and the U.S. market continues to be unpredictable and legalization hotly disputed. Although some predict national legalization at a federal level is possible, most agree it is a battle to be fought state to state, with mixed results. Globally, legalizations continue to spread. Anticipated new countries to make the adult sale legal over the next year or two include France, Italy, Peru, New Zealand, and Lebanon.

Stocks remain up in the air in Canada, as first earnings reports are issued, and consolidation begins. Many analysts say no one stock has distinguished itself, although Constellation Brands (STZ) invested $4 billion in Canopy Growth. Limits to available business licenses will generate infighting as companies scramble to solidify their positions. However, alternate forms of consumption such as vaping, beverages and edibles will pop up in Canada in 2019, and physical retail dispensaries will be opening in Ontario, where 25 licenses will be distributed via lottery, and initially denied to licensed producers. Shortages are expected to last throughout 2019.

With a Farm Bill that opened to door for CBD sourced from industrial hemp in dropping in 2018, Canopy Growth and Cronos Group, both of Canadian origin, have said they will enter the U.S. market. The farm bill aims to remove hemp-derived substances from Schedule I of the Controlled Substances Act. However, producers would be required to produce hemp-derived CBD and other cannabinoids with zero deviation from the farm bill’s guidelines, which could delay Canadian corporations’ involvement.

The farm bill aside, banking reform is the “eyes on” event for 2019.  The SAFE Act bars the federal government from punishing banks that serve the marijuana industry in states that have legalized it, while the STATES Act restricts federal agencies from interfering with states’ cannabis policies completely, while simultaneously opening up banking and tax deductions for the industry. However, early reports have been sobering; a U.S. Tax Court ruling filed in November was found to uphold section 280e of the IRS tax code, which bars deductions for any company known to traffic in controlled substances. A failure of the STATES act to pass would mean that code is still in effect.

Favorable legislation could lead to institutional investors having a higher comfort level for investing in the space; previously, cannabis remained the restricted purview of specialty hedge funds, retail investors, or small but wealthy family offices. All of this can change in 2019 as legitimacy increases.