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Canada’s Pot Flip-Flop Puts Pressure on Upstart Cannabis Stocks

Last Updated September 23, 2020 12:41 PM
Lawrence Meyers
Last Updated September 23, 2020 12:41 PM

By CCN.com: Health Canada is fed up with issuing cannabis growing licenses that weren’t actually being used to grow cannabis. As a result, new applicants looking to sell, produce, or process cannabis must already have a complete and compliant facility.

The rush to cash in on legalized cannabis, and the ease with which Health Canada licenses could be obtained, led to more than 100 applicants rushing to file paperwork.

What Health Canada’s Stunning Policy Reversal Means for Cannabis Stocks

Health Canada found it was wasting resources approving licenses  when cannabis growers had nowhere to grow:

“As a result, a significant amount of resources are being used [at Health Canada] to review applications from entities that are not ready to begin operations, contributing to wait times for more mature applications and an inefficient allocation of resources”.

The effect on cannabis growers will be two-fold. First, it should speed approval for established cannabis companies, allowing them to ramp up production to meet demand.

Second, it will lock out early-stage pot companies, who will have to put up as much as $40 million to build a facility before becoming licensed.

Hedge Fund Shorts Canadian Pot Stocks, Goes Long on US Market

This will only contribute to the insane hype over Canadian cannabis stocks, which is why a new hedge fund seeks to short Canadian pot stocks, while going long on the US market.

The fund is partially run by Boris Jordan, Chairman of Curaleaf Holdings, one of several major Canadian cannabis stocks. Not only are Canadian cannabis stocks way overhyped, Jordan adds:

[Canada’s] “stringent marketing restrictions…[make it] almost like they have one hand tied behind their back…I have a lot of respect for the Canadian LPs but I don’t want to be long them right now”.

There are other headwinds to Canadian cannabis stocks. In a survey conducted by Dalhousie University and the University of Guelph, public support for recreational weed has declined, with 20% of those surveyed saying they are “uncertain” about legalization, up from 7% in 2017.

Excitement over legalization is also waning. The study also found that interest in purchasing cannabis edibles dropped, with 36 percent saying they will buy edibles when they become legal later this year, a decline from 46 percent in 2017.

Of those who said they’d order a cannabis-laced dish at a restaurant, interest dropped from 39 percent to 26 percent. As for ordering alcoholic drinks infused with cannabis, interest declined to 16 percent from 27 percent in 2017.

The study’s author, Sylvain Charlebois, said:

“It really feels like the enthusiasm for cannabis products has really dropped this year. The framework delivered by Health Canada has killed the momentum and taken a lot of air out of the cannabis balloon.”

Hence the interest in shorting cannabis stocks, although that comes with sizable risk. Because the firm must borrow shares from existing shareholders to sell short, and those shares are hard to come by, a short-seller must pay an expensive vig to borrow them.

The fund also hopes to take advantage of what’s known as “risk arbitrage”. That’s where a trader tries to profit from the difference between a takeover target’s current price and the takeover price.

Co-Manager Justin Ort says:

“Cannabis funds typically don’t have someone on hand that knows how to play the risk arb space, so we think there’s a little bit of a window there to make very outsized returns. That’s our edge: we feel like we really have deep insights into these companies and we get in there ahead of the market’s wider understanding of them and then we try to exploit that.”

He may be onto something.  Cannabis stocks as a group are about 15% off their highs.