Canada has now officially become the second country in the world after Uruguay to legalize possession and use of recreational cannabis. 

The nation's Cannabis Act came into force on October 17, 2018. The new regulations aim to protect public health and safety by allowing adults access to legal cannabis and is a social experiment that the rest of the world will be carefully watching. Investors will also be keeping tabs on the performance of high-flying marijuana stocks and how this development affects them. 

Canopy, the biggest licensed producer in Canada, was quick to celebrate the occasion. “We couldn't be more excited to open this new, legal, regulated market for recreational cannabis in Canada and to now provide Canadians with a diverse supply of high quality, safe cannabis products," Bruce Linton, the company’s founder and co-CEO, said in a press release.

Marijuana stocks like Aurora Cannabis Inc. (ACB), Canopy Growth Corp. (CGC) and Tilray Inc. (TLRY) closed down on Tuesday. Those  stocks are the top three stocks, respectively, in the The Horizons Marijuana Life Sciences ETF (HMMJ), which fell 4.72%.

Too Late to Cash in?

Canada’s legalization of cannabis has been in the pipeline for some time now. That means that investors had plenty of opportunity to ensure that the stocks that serve the industry were priced to fairly reflect this landmark legislation before it came into effect.

"Sentiment is very positive on marijuana stocks as Canada is going legal,” said analyst Nigam Arora in an article for MarketWatch. “The sentiment is about to enter the zone of extremely positive. Often extremely positive sentiment is a contrary indicator. In plain English, this means such stocks top out and this is a sell signal for the very short term. The momo (momentum) crowd is aggressively buying marijuana stocks but the smart money is selling into the strength.“

Arora advised investors to take advantage of the volatility present in the sector. The secret, he said, is to buy in on the dips and take profits when “sentiment becomes overly positive.”

The analyst added that Green Organic Dutchman Holdings Ltd. (TGOD), Tilray, Aphria Inc. (APH), Cronos Group Inc. (CRON), Aurora Cannabis, MedMen Enterprises Inc. (MMEN), Pyxus International Inc. (PYX), New Age Beverages Corp. (NBEV) and India Globalization Capital Inc. (IGC) have fallen into this trap of very positive sentiment. He also pointed out that several stocks have gone under the radar, including Craft Brew Alliance Inc. (BREW) and Corbus Pharmaceuticals Holdings Inc. (CRBP).

Todd Harrison, founding partner and CIO of CB1 Capital Management, agreed that some stocks might currently appear expensive, attributing this to the lack of Canadian companies listed on the U.S. market. However, he was hesitant to describe them as overvalued, noting that many investors have yet to appreciate the full potential of the sector.

"Obviously the U.S. names that are listed are going to have a disproportion amount of fluff because the U.S. retail is piling into those names,” said Harrison, in an interview with Cheddar. “But keep in mind most people look at cannabis and they see something akin to a farmer, an end product where people are going to smoke weed."

He added: “We look at cannabis and we look at hemp as ingredients for a vast array of end products and use cases that most people can't contemplate right now, from medicine to building materials to plastic deposits... clothing, food. I think it's going to be a lot bigger than most people tend to think of it when you start to contemplate these things as ingredients as opposed to an end product.”

U.S. Missing Out

Harrison also predicted that it’s only a matter of time before the U.S. legalizes cannabis. Companies this side of the border certainly hope that will be the case. To mark the legalization of cannabis in Canada, California-based Terra Tech Corp. (TRTC) took out a full-page ad in the Wall Street Journal in which it warned the White House that the U.S. is "rapidly losing" its competitive advantage to Canada. The ad mentioned that many American firms have been forced north of the border to attract investment and that Canadian firms have been raising money from U.S. investors. 

Canada is the leading force in the global cannabis industry, estimated to reach $32  billion in consumer spending by 2022, according to Arcview Market Research and BDS Analytics. Bloomberg attributed Canada’s strong position to the illegal status of cannabis in America. Researchers from the C.D. Howe Institute, a Toronto-based think-tank, and the University of Waterloo says that legal supply of marijuana in Canada is set to meet only 30% to 60% of consumer demand. 

Cannabis investor and social media phenom Jason Spatafora tweeted directly to the U.S. president saying, "At midnight tonight Canada will be the global force in #Cannabis with a population that’s the same as California."