Marijuana News Today: Black Market Siphons Gains Away From Pot Stocks

Marijuana News Today
iStock.com/VladK213

Marijuana News Today

The marijuana news today has us once more looking at the marijuana black market and its considerable impact on pot stocks. This time we’re looking at New Jersey, where the marijuana black market is reportedly alive and well.

This is part of a recurring problem that is plaguing every marijuana market where recreational pot is legal; instead of erasing illegal pot sales, the black market has been surviving just fine. In some cases, it’s thriving.

The issue is one that consumers often care about most: price.

Legal weed is taxable. In fact, that’s one of the major selling points to voters;  legalizing marijuana will lead to a vast new tax base. It’s a compelling argument when you tell you someone that legalizing pot will help build schools.

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The problem is, that very same argument is what’s driving people to the black market. Taxes have been rather high on legal pot, which in turn is hurting legal sales and allowing the black market to remain in business.

This is hugely important to marijuana stocks as they are going to be increasingly reliant on sales to fuel share growth. If a significant portion of those sales is being siphoned away by the black market, the effect will be felt on the stock market eventually.

In the case of New Jersey, the state has instituted a flat tax of $42.00 per ounce. Depending on the going rate of an ounce of pot, that could be very high and push people over to the black market that they formerly relied upon to get cheaper weed. (Source: “NJ marijuana dealers say black market will be ‘business as usual,’ even with legal weed,” Asbury Park Press, March 4, 2019.)

This puts us in a bit of a bind.

Not only are taxes a public good, since the money raised will (hopefully) be used to fulfill worthwhile projects (rather than line the pockets of people flaunting the law), they are also a huge selling point for marijuana legalization. After all, politicians love to increase their budgets as it helps maintain their office by providing more to their constituents.

But the problem is that by having onerous taxation policies, governments are in some cases actually hurting the legal market, decreasing the overall tax revenue and negatively impacting pot stocks.

The answer to this problem is complicated. Reducing taxes—or reducing costs of legal pot in general in relation to the black market—is crucial. Or at least, reducing taxes to a competitive rate with the black market until it is snuffed out.

As time progresses and the still-fresh marijuana market matures, we’ll see prices naturally go down due to innovation and competition, but politics will play a huge part in that as well. But in the meantime, governments may be losing money due to burdensome tax rates driving people to buy illegally. Pot stocks will also take a hit.

Another solution is to reduce the regulatory costs. Licensing, inspection, and packaging all are very important and need government oversight/regulation. But, as we’ve seen many times before, these laws often end up costing marijuana producers a lot of money. In some cases needlessly so.

It’s still very early in the game for the legal marijuana industry, but governments need to find the sweet spot where pot will be legal, available, and affordable if they hope to quash the shadow economy that was built around pot for decades.

CRON Stock

The marijuana news today was rather quiet on the pot stock market, with few stocks showing significant movement in early-morning trading. Still, that doesn’t mean that there were no news developments.

Cronos Group Inc (NASDAQ:CRON), for instance, completed its sale of Whistler Medical Marijuana Corporation to Aurora Cannabis Inc (NYSE:ACB). The sale represented around 19% of Whistler’s issued and outstanding common shares and is valued at CA$175.0 million.

Cronos CEO Mike Gorenstein said the following:

We’d like to thank and congratulate Whistler for their partnership over the past two years…Whistler’s commitment to creating high-quality products and establishing a premium brand has generated value for consumers and investors alike. We are proud to have been part of their growth and look forward to their progress through this venture.

(Source: “Cronos Group Inc. Exits Investment in Whistler Medical Marijuana Corporation,” Globe Newswire, March 4, 2019.)

This move is par for the course for Aurora, which has a long history of acquisitions.

CRON stock, meanwhile, grew 0.5% in early-morning trading today. Over the past five days, the stock gained five percent.

The early goings-on of 2019 have been very positive so far for Cronos stock, with one of the two lone Nasdaq pure-play marijuana stocks outperforming its compatriot on the listing—Tilray Inc (NASDAQ:TLRY)—by a wide margin.

In fact, CRON stock has been one of the biggest winners so far in 2019, doubling its value in two months. I fully expect the stock to maintain that course moving forward. Both the company’s partnership with Big Tobacco and its savvy acquisitions are going to help propel Cronos to future success, in my view.

ACB Stock

On the flip side of the Whistler deal, we have Aurora Cannabis doing what it does best: buying other companies. Aurora has been the go-to dealmaker in the legal pot industry, buying up rival marijuana companies frequently.

ACB stock remained static to start the day, while it has fallen by 0.5% over the past five days.

Aurora is a bit of a question mark for me. While I’ve long liked the company on paper, there is one huge sticking point: it has yet to land a major partnership.

Companies both larger and smaller than Aurora have been able to ink deals with outside investors while Aurora has been confined to making the deals happen itself, usually via acquisitions.

While these acquisitions are slated to pay off in the long run as production capacity is built, I still have my concerns over the future of Aurora as it struggles to find a big outside investor. As such, I’m more bullish on both CRON stock and the other pot stock featured below.

If Aurora can score a partnership in the near future, expect its share price to surge, building in huge potential for ACB stock. But that’s all it is for the moment: potential.

OGRMF Stock

One of the few pot stocks that saw semi-significant gains this morning is OrganiGram Holdings Inc (OTCMKTS:OGRMF, CVE:OGI). OrganiGram stock was up about one percent in early-morning trading today, while it has soared by over 11% over the past five days.

OGRMF stock, much like ACB stock, remains full of potential—although I’d argue that there is more to like about OrganiGram. Due to the company’s size, it is in a prime spot to be acquired. If such an event takes place, its share price would no doubt soar.

Like Aurora, OrganiGram has yet to land a partnership, but it is likely a more attractive package to outside companies, due to its lower price. OrganiGram also could shift its stock to a major U.S. listing in the near future, which would help push its price higher.

OrganiGram is full of potential—much like Aurora—but has fewer barriers in its way.

CRON, ACB, and OGRMF Stock Performances

The performances of CRON stock (black line), ACB stock (blue line), and OGRMF stock (red line) over the past week are seen on the chart below.

Chart courtesy of StockCharts.com

Analyst Take

The marijuana news today has us looking at the black market and what needs to be done about it in order to help the nascent legal marijuana industry grow.

And it’s not just about marijuana stocks here; if governments genuinely want to maximize their tax base and eliminate criminality, reducing ancillary costs to production is going to go a long way toward rectifying the problem.