How the Canadian election will affect cannabis stocks

QUESTION: “I know CannTrust has been the story of the week/month and you have to spend time on it. But I, like you, am worried about the cannabis stocks in general. It has been a while since you covered the Canadian election and the impact it could have on the cannabis stocks. Are you still worried about it? What is your current view?”

A.C.O. from Burnaby, Canada

ANSWER: First, the election outlook. I use the Canadian Broadcasting Corporation (CBC) Poll Tracker that averages the results from the most important polls in Canada. The latest results show the incumbent pro-cannabis Liberal Government and Prime Minister Trudeau stand at 31.9% trailing the official opposition anti-cannabis Conservatives led by Andrew Scheer at 34.5%. In third place and running poorly with 14.9% are the socialist leaning New Democratic Party (NDP) under leader Jagmeet Singh and in fourth place are the environmentally focused Green Party led by Elizabeth May at 10.9%.

Based on these polling results, Poll Tracker concludes that there is a 24% chance the Conservatives will overthrow the Liberals and win a majority and a 29% chance the Conservatives will win the most seats but not a majority. The ruling Liberals, on the other hand, are given a 21% probability of winning a majority of seats and a 26% probability they will win a majority of the seats but not a majority.

Anyone who was politically aware of the 2016 election in Canada will know that former Prime Minister Stephen Harper ran an extremely anti-marijuana campaign spreading misinformation and mistruths about the dangers and risks of the plant. This same Stephen Harper, I am told, is behind the scenes pulling the puppet strings attached to Andrew Scheer. So if the Conservatives form the government after the October 21, 2019 election, which is the most likely scenario at this time according to the polls, we can anticipate an anti-cannabis set of policies from the new government.

Then consider the following. Marylin Gladu is the Conservative Member of Parliament for Sarnia-Lambton to recited a silly, anti-cannabis poem in the House of Commons. (see Gladu's "performance" here) Gladu is the Conservative Health Critic which means she comments for the Conservative Party on matters involving the Health Ministry that oversees cannabis regulation. If the Conservatives win in the next election and Andrew Scheer becomes Prime Minister and Marilyn Gladu is re-elected, there is a reasonable chance the next Minister of Health will be Marilyn Gladu!

The one thing about the stock market is that shift happens. For the past month we have had a steady stream of negative news as a series of CannTrust’s transgressions have come to light. Taken individually or as a package, the news has been unbelievable and as I’ve said here many times, the CannTrust scandal has taken a bear market in cannabis stocks even lower than it might have been.

I have written about “buy on mystery and sell on history” many times so regular readers are aware of what this means. For new readers, however, an explanation will help. The stock market is not a thermometer, it is a barometer. In other words, today’s stock market is not a thermometer telling us the current temperature. It is a barometer telling us what the temperature is going to be. So the time to buy cannabis stocks, for example, is when an event like legalization in Canada is still in the offing. When we don’t know how it will happen. Who will get licenses. When there are unknowns. When there is mystery. The time to sell stocks is on history. When the expectations are news or about to be news.

This opens up a possibility. The stock market loves to provide the reaction that few people are expecting. If the October election produces the result that currently seems destined to occur, it will be an obviously negative event for Canadian cannabis stocks. However, because of CannTrust it might be that the cannabis stock market cycle will view the election as a “buy on mystery” opportunity. In other words, CannTrust may have pushed prices so low the response to the election of an anti-cannabis Conservative government might be rising cannabis stock prices. Why? Because investors might conclude that cannabis stock prices are so depressed and expectations for the new Conservative government are so negative, the actual response will be seen as not as bad as expected. In addition, if you are buying a week or two before the election, the Liberals could always pull off an upset and that would be even better.

The one lesson we can take from the response of Aphria to the “fake news” that they are the first Licensed Producer to record a profit drove the stock up 40% and carried the cannabis stock market along with it. Unfortunately, I think the whole positive response will unwind just as fast. But what it does show is the cannabis stock market is down but just waiting for an excuse to rise. So it could happen.

Conclusion: at this point, I am still concerned about a destructive impact on the Canadian cannabis industry from the election of a Conservative government. But it is possible that the market could see things differently. Hopefully we can detect that possibility between now and then. The election is less than three months away so we won’t have long to wait.