How did these local pot stocks react to Canada legalising cannabis?

Canada became the second country in the world, and the first of the G7 nations, to legalise the recreational use of cannabis last week. As of Wednesday, 17 October (local time) Canadians could purchase dried cannabis from licensed retailers, and they can now legally possess up to an ounce of dried cannabis in public. In Newfoundland, one of the easternmost points in Canada and the first part of the nation to strike midnight, hundreds of people queued up to be among the first to legally purchase recreational weed.

Personally, I’m surprised at how little media coverage this news has received in Australia. When California legalised recreational weed at the beginning of this year it was a massive deal – and so it should have been. For the financial health of the burgeoning global cannabis industry, the California legalisation meant far more than what has just happened in Canada. California is the most populous state in the US and is the world’s fifth largest economy.

But for local cannabis companies, the fact that Canada has just legalised the sale and recreational consumption of weed could be more meaningful because of the precedent it sets. In a lot of ways, the Canadian governmental system is not so different from Australia’s. A fellow Commonwealth nation and Westminster-style democracy, Canada could set a blueprint for other countries like Australia to follow should they also choose to go down the path of full legalisation.

So it was also surprising to me that the local market reaction to events in Canada was so subdued. I would have assumed that Australian-based cannabis companies would be shouting this news from the mountaintops in order to reinvigorate the national debate.

Small caps Creso Pharma Ltd (ASX: CPH) and Hydroponics Company Ltd (ASX: THC), both of which have subsidiaries operating in Canada, released statements to the ASX welcoming the developments in Canada. But bigger players like Auscann Group Holdings Ltd (ASX: AC8) and Cann Group Ltd (ASX: CAN) were oddly silent.

Granted, this has been a tumultuous week for global markets. Taking its cue from Wall Street, the ASX hit a new six month low on Monday – although the All Ordinaries did manage to recover enough to finish the week slightly in the green.

So taken in that context, perhaps the performance of local pot stocks was actually pretty decent. Shares in Creso Pharma performed strongly, surging over 13% for the week, while the Hydroponics Company posted gains of almost 3% and Cann Group was up about 1%. The only major pot stock to finish the week in the red was Auscann, which closed down 1%.

But compare this to what happened the week California legalised recreational cannabis – when each of these companies posted high double digit gains – and you can see it’s a pretty stark contrast.

The subdued performance could send a number of signals. Perhaps it just shows that a greater deal of risk aversion has returned to the share market recently. After a sustained period of growth both here and in the US, markets were due for a correction. Seeing global equities prices tumble doesn’t put investors in a buying mood.

But it may also simply indicate that a lot of the growth potential for the cannabis industry is now baked into the share prices of these companies.

Cannabis companies in North America have also proliferated recently. Despite projections for the value of the industry being in the billions of dollars annually, the sheer number of players fighting it out for market share may make it more difficult for individual companies to remain profitable.

Foolish takeaway:

The national experiment now being undertaken in Canada is great news for the global pot industry, even if the local reaction has been more muted than I –  a shareholder in many of these pot stocks myself – had been hoping for. It just goes to show that, as a new industry grows, increased competition can bring its own set of risks.

Expect a lot of jostling and M&A activity in Canada over the next few years as companies try and position themselves for success in this new landscape. But if the Canadian subsidiaries of Aussie pot companies like Creso Pharma or the Hydroponics Company can survive – and post profits – these pot stocks could still soon light up the ASX.

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Motley Fool contributor Rhys Brock owns shares of AUSCANN FPO and Creso Pharma 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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