Shares of Ottawa pot firms slump amid U.S. political uncertainty

Cannabis

The hazy state of legal cannabis in the United States spurred a tumultuous week for Ottawa-area pot firms, with local companies approaching the end of 2018’s first trading week on a low note.

After hitting its highest-ever stock price of $5.65 on the Canadian Securities Exchange this week, CannaRoyalty saw its gains erased by Friday morning, returning to 2017 levels of roughly $4 per share. The firm, which acts as an investment vehicle for investors looking to get exposure to legalized cannabis markets in North America, initially benefited from California’s legalization of recreational cannabis that came into effect on Monday. While cannabis remains federally illegal in the U.S., the west coast state is the latest American jurisdiction to legalize pot for leisure-use, and is already one of the world’s biggest cannabis markets.

But U.S. Attorney General Jeff Sessions threw the industry into confusion with a memo on Thursday that rescinded an Obama-era policy discouraging federal prosecutors from targeting states where the substance has been legalized.

That announcement sank CannaRoyalty’s shares by 24 per cent over the course of the day. In response, the firm released a statement on Friday encouraging calm in regards to Sessions’ move, reminding investors that the attorney general’s memo reflected a change in guidance only, not law.

“We do not foresee the memorandum meaningfully impacting the way that existing cannabis business is conducted within legal states."

“No legal change has taken place here. We do not foresee the memorandum meaningfully impacting the way that existing cannabis business is conducted within legal states,” said CannaRoyalty CEO Marc Lustig.

He added that while the current confusion may lead to near-term “volatility,” CannaRoyalty believes 2018 will be a growth year for the company.

The conflict between the federal and state-by-state legality of cannabis has been a strategic opportunity for CannaRoyalty because institutional investors such as banks won’t touch the controversial substance. The firm invests or takes ownership stakes in pot producers and related businesses, giving investors a legal avenue to get involved in the booming industry.

Shares of CannaRoyalty (CSE:CRZ) were back up to around $4.35 in midday trading.

It’s been a volatile week elsewhere in the Ottawa area, as cannabis producer Canopy Growth (TSX:WEED) saw its share price fluctuate wildly after seeing gains over the holiday season. Shares of the Smith Falls-based firm ranged between $30 and $35 in the first week of the year, trading around $33 as of midday Friday.

More broadly, some observers and industry players say the crackdown will be a boon for the Canadian cannabis industry.

Echelon Wealth Partners analyst Russell Stanley said if marijuana continues to be illegal at the federal level, it will benefit Canada as this will suppress the rise of any large U.S. cannabis companies to challenge Canadian marijuana producers as they expand globally.

"It keeps the U.S. out of that game and it allows Canada to pursue these opportunities with relatively little competition," he said.

Cam Battley, the executive vice-president of Edmonton-based licensed marijuana producer Aurora Cannabis Inc. (TSX:ACB), called Sessions's stance "misguided public policy" that is counter to broader U.S. public opinion. However, he also said this will drive additional U.S. investment and investors north of the border.

"It cements the fact that we will not be seeing for the foreseeable future, well-capitalized U.S. competitors as we expand our operations around the world," said Battley. "And it just prolongs that unusual situation, where large-cap Canadian cannabis companies have the world to ourselves."

–With a report by the Canadian Press