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  • Writer's pictureTed Ohashi

Will cannabis stocks go into a bear market before reaching their potential?

QUESTION: I follow your weekly letter and your work on Seeking Alpha. As a result, I own Khiron Life Sciences (TSXV: KHRN) and it is doing extremely well. If the Liberals lose the upcoming election, will the cannabis stocks go into a bear market before KHRN reaches its full potential?

R. H. from Alberta, Canada

ANSWER: Good questions. I planned to comment on the election and if you would like more detail on the election situation, please read ‘Marijuana Matters’ below. In brief, however, in the 2015 election the subject of cannabis was a hot topic that I commented on many times in these pages. The incumbent government four years ago were Prime Minister Stephen Harper and the Conservative party and they were and are extremely anti-cannabis. Justin Trudeau and the Liberal party were the challengers and one of the planks in their political platform was full legalization of cannabis. When the electorate spoke, Harper and the Conservatives were out and Trudeau and the Liberals were in.

The Liberals followed through on their promise to legalize cannabis although it has taken a little longer than most of us hoped. In Canada, the voters will usually give a new party and Prime Minister a second term and sometimes more unless they really screw things up. Trudeau is in the process of screwing things up. There have been little stumbles along the way but very recently the Prime Minister really got himself into a pickle over a Quebec-based company - SNC-Lavalin. This is a very complex matter which I describe in more detail below. But it involves a Federal Government pandering to Quebec as all governments do, Trudeau and his aides apparently trying to pressure the Minister of Justice to ensure SNC-Lavalin is not charged criminally but with fines, the Minister of Justice being an aboriginal and a woman which are two groups the Liberals appealed to in the last election, the Minister of Justice’s father being a hereditary Chief and one of the most influential leaders of the First Nations, and so it goes.

In one misstep, the Prime Minister offended just about every important group that was instrumental in his election. The only reason the situation isn’t an even greater disaster is after Harper lost the last election, he resigned and the opposition Conservatives have a new, relatively unknown and inexperienced leader. The third party in Canada are the New Democrats that have done well at times in the past but they have what can only be described as a new, totally ineffective leader. He is so bad that while running in a bye-election to gain a seat in parliament, one strategy floated by the other parties was to run losers against him. That way he will be sure to be elected and having him as the New Democratic leader is the best thing the Liberals and Conservatives could hope for.

Re-election that should not have been a problem is now in doubt. So for the Canadian cannabis stocks:

  1. If the Conservatives upset the Liberal applecart, I don’t think they can reverse the legalization process. We’re too far down that road and Conservatives have admitted as much.

  2. But what is more likely is the Conservatives will slow progress in the Canadian cannabis industry. The approval of new licenses can be slowed to a crawl, new regulations can be passed that will make growing more costly and slow sales growth, and so on.

  3. The group that is at greatest risk is the edibles sector. The Liberals promised approval within a year that would make it October 17, 2019 and the election is October 21, 2019. Depending on how the approval happens, it might not be completed before the election or it may not be so far advanced to prevent a new government from slowing it or stopping it. Of course, cannabis infused alcoholic beverages are already outside of the October 17th deadline.

  4. I think a Conservative government would mean a hiccup on the cannabis stocks. Maybe not a bear market but a dip for sure. This is another reason I think today’s investor should be looking at companies with a business base outside of Canada.

  5. I don’t think companies such as Khiron (TSXV: KHRN), 1933 Industries (CSE: TGIF), Lexaria (CSE: LXX) or Sunniva (CSE: SNN) will be impacted as much as those with massive production based in Canada. Each of these companies are clearly not dependent on the Canadian market for their long term success.

The upcoming election is something that enters more and more discussions I have with people who know the cannabis industry and it is certainly something to keep an eye on. But with respect to your specific question, I don’t think it will have much if any impact on Khiron’s business prospects or stock price.

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