Are Aussie pot stocks set to smoke the market in October?

On October 17, Canadian adults will finally be able to legally buy marijuana for recreational consumption. According to an article published by Forbes last week, the value of the recreational cannabis market in Canada is expected to be somewhere in the range of US $5 billion to US $10 billion this coming year.

When retailers in California officially opened their doors to recreational pot smokers on 1 January, 2018, the share prices of Aussie pot stocks went bananas. In the first week of January, the price of shares in Auscann Group Holdings Ltd (ASX: AC8) almost doubled, Hydroponics Company Ltd (ASX: THC) and Cann Group Ltd (ASX: CAN) both surged almost 50% higher, and MMJ Phytotech Ltd (ASX: MMJ) gained over 30%.

But since then shares in all the main Aussie pot stocks have trended way down. Leaders in the industry, Cann Group and Auscann, have held up the best, but even they have shed about a third of their market caps since that heady first week in January. Smaller, more risky companies like MMJ, Creso Pharma Ltd (ASX: CPH) and THC have all basically halved in value.

So what can we expect from the Aussie pot stocks in a few weeks when selected stores in Canada begin selling weed?

It’s hard to say. The market has known that this day has been coming for a long time now. Although the Canadian senate only officially passed the C-45 Bill, known as the Cannabis Act, in June, legalising marijuana had been a key pledge of Canadian Prime Minister Justin Trudeau during his election campaign as far back as 2015.

But the same could have been said for California. Proposition 64, also known as the Adult Use of Marijuana Act, which legalised cannabis in California, became law in November, 2016. So the market had a long time to try and price in the impacts of the new law – and yet it still seemed to come as a surprise to everyone when weed stores actually opened their doors in January.

However, since then, it does feel like the idea of a recreational cannabis industry has become much more normalised. It has even been reported this month that the Coca-Cola Company is considering selling beverages infused with cannabidiol, a non-psychoactive ingredient present in marijuana.

That’s where the world is now, most likely because the situation in California has helped to normalise the conversation. However, as recently as January, California still represented a big test case for the global weed industry. At that time a handful of American states had already legalised marijuana for sale and consumption, including Colorado, Washington, and Massachusetts.

But California was different. This was America’s most populous state and the world’s fifth largest economy. Putting aside the symbolism of a G7 nation passing federal laws to legalise marijuana, the fact that California was selling weed was a much bigger deal financially than what’s about to happen in Canada.

Foolish takeaway:

No one has a crystal ball – and if we did we’d all be millionaires.

I own shares in a number of pot stocks and have ridden the industry highs and lows over the last couple of years. I hope for a favourable reaction from the ASX in the period leading up to and immediately following the first recreational marijuana sales in Canada next month. But I do think the impact will be much more subdued than what we saw in January.

If you’re looking for some local exposure to the industry, the big players like Cann Group and Auscann are probably the lowest risk options. Otherwise, MMJ and Creso Pharma both offer avenues into the Canadian market through their international interests or subsidiaries, but given their tiny market caps, they carry significantly higher risk. I would even say that, unless their share prices can gather some significant momentum in the short term, I would currently classify them as below investment grade.

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Motley Fool contributor Rhys Brock owns shares of AUSCANN FPO, Creso Pharma Ltd, and MMJ Phytotech Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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