In October 2018, Canada became the first major industrialized country to legalize the production, distribution, sale, and possession of cannabis for adults of legal age for recreational purposes. The legal framework paved the way for a regulated cannabis industry, which attracted more investors and consumers.
This article explores the effects of recreational cannabis legalization (RCL) on the performance of cannabis stocks, using the Canadian marijuana market as an example.
The Canadian Experiment: A Case Study in Cannabis Legalization
It has been five years since Canada legalized the production and sale of marijuana and cannabis-infused products across its provinces and municipalities. The country’s strong decision, detailed in the Cannabis Act, allowed businesses and individuals to legally access cannabis for non-medicinal purposes.
In other words, the Canadian government made a shift from considering cannabis as an illicit drug to the adoption of the substance for recreational purposes among adults from 18 years. The legislative development in the Canadian marijuana industry resulted in an increase in cannabis use.
According to Statistics Canada, the country had experienced more than double the rate of cannabis use compared to the previous 30 years before the legalization. From 1985 to 2017, the cannabis consumption rate went from 5.6% to 14.8%. After legalization, the rate of cannabis use among Canadians went higher.
For instance, in 2021, 22% of Canadians 15 years and above reportedly used cannabis in the previous year, with provinces like Ontario, Nova Scotia, British Columbia, and Prince Edward Island pulling much greater numbers than Quebec and the rest of the country.
Canada’s cannabis sector was valued at $10.8 billion in 2023, an increase from its $6.4 billion valuation in 2018. As such, market analysts anticipate that local and international investors will opt for marijuana stocks in the legalized environment. At the same time, more cannabis companies will expand into the Canadian market over the coming years.
Investor Enthusiasm vs Market Reality
When it comes to investing in securities and financial instruments like stocks, market trends and investors’ behaviors usually influence the market reality.
In a country like the United-States, where the regulatory framework for cannabis production and distribution is not straightforward, investors and consumers tend to have speculative sentiments toward the American marijuana market. Because of this, the demand for cannabis stocks keeps fluctuating, as the industry remains high-risk.
Conversely, the properly regulated Canadian market has seen the performance of cannabis stocks skyrocket post-legalization. For context, the country’s marijuana industry grew from around $6 billion to about $11 billion within four years after the plant was first legalized for medicinal purposes.
Besides the straightforward laws around the cultivation, production, and sale of marijuana products and the increase in demand, publicly-traded Canadian marijuana companies had better market valuations.
The growth in their stock prices attracted retail and institutional investors looking for alternative ways to make money outside the traditional stock markets – just like the dotcom bubble in the ‘90s when technological advancements were at their peak.
Though the current market valuation has now reduced because of the dip in the global cannabis industry, experts predict a continuous annual growth rate (CAGR) of 15.40% between 2023 and 2028. The increase will drive the market volume to about $7.98 billion in 2028.
Regulatory Announcements and Stock Performance
Another important factor that influences the growth of the cannabis industry and the overall stock performance is the build-up that comes after major regulatory announcements. Every public political announcement or regulatory reform influences the overall market sentiment and, by extension, the demand for cannabis stocks.
When an announcement about a new industry reform or other developments, the announcement effect can either be positive or negative. For example, the Federal Reserve’s interest rate hikes are usually met by negative market reactions, while a new positive regulation will typically result in optimistic trends and stock performances.
According to a recent survey by the Canadian government, the rate of cannabis consumption increased among young people pre-legalization. However, consumer behavior wasn’t the only thing affected, as stock performances surged between 2018 to 2022.
Some Canadian stocks became top dividend performers on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX), especially after the 2021 COVID-19 pandemic. The top pot stocks were from brands like Canopy Growth Corp, Tilray Brands, and Cronos Group.
However, it’s important to note that these marijuana stock prices have declined in 2023 as the industry continues to shape up and provide more opportunities to investors in Canada and beyond.
The Comparative Analysis of Cannabis Companies
Before recreational cannabis legalization (RCL), many marijuana companies struggled to survive the volatile market, as the lack of an operational legal framework caused reduced interest in marijuana stocks among investors.
During the pre-RCL period, the American market dominated the cannabis landscape, with major brands like Curaleaf, Green Thumb, and Verano Holdings offering the best marijuana stocks on the market.
Similarly, cannabis companies were faced with various hurdles, including the lack of support from banks and other financial institutions, making it difficult for them to secure funding or grants. Overall, the cannabis landscape was considered high-risk by many investors who considered traditional stocks safer.
Fast forward to the post-RCL era, the cannabis landscape has evolved from what it used to be. There has been more growth among marijuana companies, which are now more valued based on their improved market capitalization. Investors are foraying into the Canadian marijuana market in their numbers, and the general industry growth is prominent.
In other words, it’s safe to say Canadian investors and the country’s cannabis sector have an edge over locations with strict or unclear regulatory frameworks around the production and sale of cannabis-infused products.
Global Perspective on Cannabis Legalization and Stocks
Though the Canadian cannabis industry has an existing regulatory framework to work with, the laws around the cultivation and consumption of marijuana for recreational or medicinal purposes vary from country to country.
As of the time of writing, only a few countries, including Canada, Georgia, and South Africa, have legalized cannabis for non-medicinal use. The majority of other countries either have varying laws at their state levels or completely prohibit the production and use of marijuana at the federal level.
For instance, the United States federal laws consider cannabis illegal, which negatively impacts cannabis stock performance and the overall industry’s growth in the country. However, about 30 states, including California, Colorado, Massachusetts, and Arizona, allow the use of marijuana for either recreational or medicinal purposes.
Though the friendlier laws at the state level allow marijuana-focused companies to thrive in the U.S., their growth is limited because of the mixed investor sentiment and difficulties in companies expanding into newer markets due to varying laws.
Countries like Canada have led the way in establishing general regulations for cannabis companies and consumers. The U.S. and other notable countries treading the same path will see a global expansion in the marijuana industry, as there will be more demand for cannabis products by end users, and stocks by investors.
Conclusion
The cannabis industry is relatively young and evolving, but it has shown great signs of what is to come in recent years. From massive growth in stock prices to significant gains for investors, stock performances have been generally impressive.
Currently, the cannabis stock market is down as a result of market correction after the 2021 bullish run. With market volatility and low demand for marijuana products plaguing the industry, the Canadian marijuana market has shown that cannabis companies can be more successful in the stock market with clearly defined regulations.
As we gear up for 2024, cannabis legalization remains pivotal to the industry attaining its projected growth. If countries like America adopt Canada’s regulatory approach, experts believe there will be another boom in the global cannabis industry.
Tobi Opeyemi - Financial Writer
Tobi, a journalist and crypto writer since 2017, is renowned for his educational content in the digital currency realm. His journey includes a significant tenure with Stockbossup, an investment platform committed to enlightening the black community on financial matters. Before this, Tobi honed his skills as a copywriter at Turboxbt, a platform specializing in cryptocurrency trading. Notably, Tobi's insights are featured on Investopedia, where he contributes articles on a range of topics. He is also celebrated as one of the top web3 creators on LinkedIn, known for content that consistently drives engagement and sparks conversations in the industry. With a background in Pharmacy, he brings a unique perspective to his writing, especially in the Cannabis sector.
