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Canopy Growth Falls After Wild Ride for Canadian Weed Stocks (3)

Greg Quinn and Eric LamNov 17, 2016 9:40 am ET

(Bloomberg) -- Canadian marijuana stocks slumped on Wednesday after swinging wildly on huge volumes, denting a sizzling rally fueled by speculation the march toward legalization will be a boon for business.

Trading was halted several times after circuit breakers were triggered on several stocks. Canopy Growth Corp., Canada’s largest producer of already legal medical marijuana, rose as much as 33 percent in Toronto before closing down 15 percent at C$11.40. Aphria Inc. fell 8.4 percent after rising as much as 24 percent and OrganiGram Holdings Inc. slid 11 percent after a 17 percent rise. Volumes traded on the three stocks were at least 18 times more than the one-year average.

“A lot of people were itchy on the trigger fingers, and when these things start to sell off they sell off hard,” Bruce Campbell, fund manager at StoneCastle Investment Management in Kelowna, British Columbia, which holds pot stocks, including Aphria and OrganiGram. “If you were the one who bought Canopy at $17 you probably aren’t feeling too good about yourself right now.”

The retreat underlines that investors see limits to the potential of the marijuana industry even with a rush of positive news. The shares gained after U.S. elections added more states to the list of places where legalization could move ahead, while Canopy also had stronger earnings on Monday and its chief executive officer said the Smiths Falls, Ontario-based company would be profitable even if Canada’s legalized recreational market opened with a 25 percent tax.

Task Force

Loblaw Cos., owner of the Shoppers Drug Mart pharmacy chain, also said Wednesday it’s engaging with the government to dispense marijuana from stores, giving it a stamp of further legitimacy. Loblaw President Galen Weston said the company has applied for a mail dispensing license for the drug.

Prime Minister Justin Trudeau’s government will probably choose to control the distribution of legal recreational marijuana through government-run outlets such as liquor stores, Canopy CEO Bruce Linton said Monday in an interview at Bloomberg’s Ottawa newsroom. A task force is due to report this month on how Canada can build a legal weed market that squeezes out organized crime, protects minors, ensures quality and adds to revenue through taxes.

“We can probably carry a tax burden of 25 percent or so and end up in the consumer hands on a still cost-competitive basis, with a superior product,” Linton said.

U.S. Investors

Canopy became the first marijuana producer to trade on a major North American stock exchange when it graduated to the Toronto Stock Exchange in July. It became the first publicly traded Canadian producer of the drug in 2014. Canopy shares are still up 367 percent over the past 12 months.

“Any time there’s more media attention to the sector it brings in more investors,” Jason Zandberg, an analyst covering marijuana producers at PI Financial Corp. in Vancouver, said by phone. “We found that there’s been a lot of interest from U.S. investors. They have a difficulty in investing in the sector given the weird framework that’s in the U.S. where it’s illegal at a federal level.”

Canopy already produces medical marijuana under an existing legal regime. Linton says the company, which operates out of a former chocolate factory, can shift production to serve the recreational market when Trudeau’s government makes that legal.

Part of the appeal of the legal variety will be its quality control, Linton says. “When it’s lawfully available from a reliable supply chain, which we know we can trust and believe in, there are a lot of people who might discontinue the use of say a glass of wine or a beer and try this.”

Canopy can also generate new formulations of medical marijuana to sell through pharmacies as legalization moves ahead, Linton said.

A few marijuana stocks ended up today. Aurora Cannabis Inc. rose 12 percent to C$2.94 and Emerald Health Therapeutics Inc. rose 20 percent to C$1.40.

(Updates with closing share prices in second graph.)

--With assistance from Theophilos Argitis and Aoyon Ashraf To contact the reporters on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net, Eric Lam in Toronto at elam87@bloomberg.net. To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier, Jacqueline Thorpe

©2016 Bloomberg L.P.


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