The cannabis industry scored a huge victory this week. And if my analysis is correct, cannabis stocks are setting up for a big rally in the next few weeks and even bigger rally in the long run. Let me explain.
On Sunday night, news leaked that on April 10 Canada will announce plans to legalize recreational cannabis by July of 2018. Here’s some coverage from CBCNews if you’d like to take a closer look.
This is a huge win for the cannabis industry and cannabis stocks. Much bigger than 7 U.S. states legalizing medical or recreational cannabis last November.
Cannabis is about to become fully legal in Canada for medical and recreational use. On the recreational side, it’s going to be just like buying a pack of cigarettes or a a 6-pack of beer. On the medical side, it will be prescribed even more as sleeping or anti-anxiety medication for example.
Cannabis will be regulated and taxed but openly available to adults with a valid ID or doctors prescription.
In the short run, the good news out of Canada gave cannabis stocks a much needed shot in the arm.
The MJIC North American Cannabis Index is having one of its best week of the year. The index is up 9% in the last five days.
What you can also see in the chart is that the cannabis sector is rebounding from its 6-month low.
I pointed out this key area last week and said I expected it to attract new buyers – just as it did in back in late December. And that’s exactly what is happening right now.
In the next few weeks, I expect the Cannabis Index to retrace to the top of its 6-month channel near 170.
If that happens, individual cannabis stocks should be popping and there should be plenty of gains on the table.
Shifting into the long-term view is where things get even more interesting.
Canada is about to unleash a $23 billion market that is expected to be larger than the beer and wine sales combined.
According to leading research firm Deloitte, the base retail cannabis market is worth between $4.9 billion and $8.7 billion annually.
Including ancillary industries such as growers, testing labs and security, the market grows to between $12.7 billion and $22.6 billion.
And finally, adding tourism revenue, business taxes, license fees and paraphernalia, Deloitte estimates the total cannabis market could be worth more than $23 billion annually.
The implications of that number are huge.
Right now, the MJIC Canadian Cannabis Stock Index, an index of 10 of the largest Canadian cannabis stocks, has a total market value of just $4.65 billion.
If the industry is going to generate around $25 billion in economic activity every year, these companies need to grow at least 20X to 30x to even think about meeting all the coming demand.
If that’s the case, I expect Canadian cannabis stocks to deliver absolutely ridiculous returns in the next 5 to 10 years.