The Real Reason Investors Should Be Excited About Canada’s Expected Marijuana Legalization

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Big things are afoot in the legal cannabis space. Following a year of many firsts, the biggest news looks to be the expected legalization of recreational marijuana by this coming summer in Canada. Should Canada move forward with the Cannabis Act in June and vote to legalize, it would become the first developed country in the world to do so, and only the second country overall behind Uruguay. And as things stand now, legalization looks extremely likely.

Meanwhile, growers in Canada have been busy expanding their production capacity as quickly as their balance sheets will allow. Growers like Canopy Growth Corp.(NASDAQOTH: TWMJF) and Aurora Cannabis (NASDAQOTH: ACBFF) appear fully capable, based on recent expansion updates, of producing in excess of 400,000 kilograms of dried cannabis per year when fully ramped up.

A tipped-over bottle of dried cannabis lying atop a messy pile of cash.

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A tipped-over bottle of dried cannabis lying atop a messy pile of cash.

Image source: Getty Images.

This expected legalization, capacity expansion, and shift in favorability toward cannabis among the public, has Wall Street and investors stoked, to say the least. Pot stock valuations have exploded higher by triple- and quadruple-digit percentages since the beginning of 2016 in anticipation of sales doubling or tripling on an annual basis over the next couple of years.

Why marijuana stock investors should be thrilled with Canada’s expected legalization

But what if I told you that rapidly rising sales and even profits aren’t the real reason why investors should be excited about Canada’s expected legalization of adult-use weed. Instead, pot stock investors should be thrilled that legalization could put an end to, or at least reduce, the biggest issue they face: dilution. It’ll do so by opening the door to financial institutions that’ve primarily been shut out of the industry.

The issue for banks is pretty clear: With the exception of Uruguay, marijuana is illegal in every other country around the globe. This means that financial institutions offering basic banking services to pot-based businesses could face two types of penalties. First, they could be fined by regulators in countries where cannabis illegal. The other possibility is banks could face criminal charges. These two concerns have pretty much kept financial institutions on the sidelines, despite the opportunity that servicing the weed industry presents.

However, that changed in February with legalization in Canada looking likely. Canopy Growth, the largest marijuana stock by market cap, completed a 175 million Canadian dollar offering (US$135.9 million) that was co-led by Bank of Montreal (NYSE: BMO) and GMP Securities. It marked the first time that one of Canada’s five big banks dipped its toes in the water when it came to equity financing for the cannabis industry.

By: Sean Williams, The Motley Fool

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