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US media giants are talking up Canadian weed

12/04/2017

In the last couple of weeks, major US media outlets have reported breathlessly on billions of dollars of projected revenue from the Canadian weed industry.

CNN: Canada Could Make Billions From Legal Pot

Newsweek: Legal Pot: Will Canada’s Plan to Get High Go up in Smoke?

Bloomberg: Canadian Pot Stocks Rally on Trudeau’s Dollar-a-Gram Tax

Numerous studies have demonstrated that mainstream media coverage can stimulate investor interest.

In a dramatic and often cited example from 2001, The New York Times (NYT) wrote about a pharmaceutical company called Entremed.  The next day the stock surged 400% although the NYT article contained zero “news content”.  It simply re-stated and re-framed information that was already in the public domain.

Entremed’s stock price surged for two reasons.

Firstly, the NYT article exposed Entremed’s story to a wider audience.

Secondly, journalistic coverage from a revered news source made Entremed’s business model seem more authentic.

CNN, Newsweek and Bloomberg don’t have the reputation of the NYT and the credibility of the news business may have been weakened in the last decade – but it’s still bullish when a frontier industry moves from the periphery to the center of the media conversation.

From CNN:

Canada’s Cannabis Act was introduced in the Canadian Senate Tuesday, its last legislative stop. The bill enjoys wide public support and the backing of Prime Minister Justin Trudeau.

“I think it is broadly recognized that criminalizing cannabis has been a failure,” said Senator Tony Dean of Ontario, a sponsor of the bill. He believes it will pass by July 2018, if not before.

According to recent estimates from Marijuana Business Daily, an industry publication, annual sales for Canada’s recreational marijuana market could range between $2.3 billion and $4.5 billion by 2021.

Canada’s move toward legalization has already inspired one U.S. company, the New York-based alcohol beverage producer Constellation Brands, to buy a 10% stake in the Canadian pot company Canopy Growth Corp. for $190 million.

John Kagia, a cannabis industry analyst for New Frontier Data, called the recent move towards Canadian legalization a “wake up call to all investors who were sitting on the sidelines, that this is really going to happen.”

From Newsweek:

Conservatives in the House of Commons tried to force a delay in the legalization roll-out, but that lost out by a landslide, with a 199-83 no vote.

Canada’s 10 provinces are tasked with creating their own legal frameworks before the roll-out next year––including policing, tax revenue allocation, operating rules, restrictions and punishments for black-market sales.

Prime Minister Justin Trudeau has said legalizing marijuana quickly, despite any challenges associated with doing so, was better than allowing the black market to prevail.

“Young people have easier access to cannabis now, in Canada, than they do in just about any other countries in the world…the fact is it is bad for the developing brain and we need to make sure that it’s harder for underage Canadians to access marijuana,” he said at an economic conference in 2016.

“The other piece of it is there are billions upon billions of dollars flowing into the pockets of organized crime, street gangs and gun-runners, because of the illicit marijuana trade.”

From Bloomberg:

Canadian marijuana stocks surged Friday after Prime Minister Justin Trudeau’s government proposed a tax of one dollar a gram of legalized recreational marijuana.

The government said Friday the tax shouldn’t exceed C$1 (79 U.S. cents) a gram or 10 percent of the producer’s price, whichever is higher. Retail sales levies would be applied on top of that.

For example, 1 gram of dried cannabis costing C$8 to produce would be taxed at C$1, and the total cost of C$9 would be hit with a sales tax of C$1.17, bringing the total to C$10.17, the government said in a statement.

Aurora Cannabis Inc. surged 15 percent to settle at C$4.64 in Toronto, the highest closing price on record. Canopy Growth Corp. gained 3.3 percent, Aphria Inc. rose 4.1 percent and MedReleaf Corp. rallied 5.3 percent.

Canada will legalize recreational marijuana by next July and the plan echoes Trudeau’s recent proposal to make the price of recreational weed low enough to squash the black market. The federal government proposes to split the producer tax revenue equally with the provinces.

Net foreign purchases of Canadian stocks in 2016 is about $50 billion. The TSX currently has 2,200 listed companies with a combined market capitalization of about $2.8 trillion.  So foreign investment is still relatively small.

An exhaustive analytical study out of Yale University confirms, that “both retail and institutional investors appear to tilt their portfolios toward geographically local stocks at the expense of their remote counterparts.  What we interpret causally as a media effect may reflect little more than the tendency of both local papers and local investors to pay attention to local stocks.”

When mainstream foreign press starts covering local stocks, it’s worth noting.

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