Supply Shortages, Regulatory Hurdles to Keep Marijuana Stocks Depressed

Marijuana stocks, such as Aphria Inc. (TSX:APH), are under threat from supply shortages and regulatory hurdles.

The recent rout in Canada’s marijuana stocks has left many investors wondering if that was an end to the pot party that, according to some forecasters, had just started.

The reality in the market is quite different than what many speculative investors were hoping for after the legalization of recreational cannabis use in Canada.  

Since the country legalized recreational pot on Oct. 17, marijuana shares have been under pressure on concerns about high valuations, supply shortages, and limited distribution networks in the country.

In Ontario, Canada’s largest province, the supply distribution is in total chaos. The province has decided to sell marijuana only online. But its newly created online channel, Ontario Cannabis Store, is unable to supply orders on time. In some cases, it’s taking more than two weeks for the order to arrive.

As I’ve warned in my earlier articles, the legalization-triggered rally wouldn’t last long, as there is many a slip between the cup and the lip!

First, not all companies in the marijuana space will succeed at the execution stage, which requires producers to have an efficient system of production, packaging, delivery, and marketing. Aphria (TSX:APH) CEO Vic Neufeld predicted the supply shortages on the company’s earnings call last month.

Citing supply-chain issues, labour shortages, and delays in getting licences and excise stamps from the government, Neufeld said Aphria would be unable to meet demand in the first two to three months after legalization. The company was forced to destroy almost 14,000 plants worth $979,000 in the last quarter due to a lack of qualified greenhouse workers.

Another concern hitting marijuana stocks quite hard is the fear that if supply bottlenecks continue and the government fails to create a smooth system to transfer demand from black market to legal channels, then investors won’t be able to justify high valuations they have attached to these pot stocks.

Aphria trades at a 12-month trailing multiple of 85, and Aurora Cannabis trades at 60, even after the recent pullback in their share prices.

“The extremely limited distribution network in many provinces, fulfillment challenges in Ontario, inventory shortage in Quebec and LPs coping with limited availability of excise stamps may take several months to be resolved,” according to GMP Securities analyst Martin Landry. “It becomes increasingly clear that recreational cannabis sales in 2018 will be much lower than previously expected.”

Bottom line

I believe the downward move that started soon after the legalization of pot in Canada has still more room to run. The report card of the past two weeks suggests that it will take a lot of time before companies and the regulators could work out a system where marijuana demand is met through the legal channels. That means a long wait for investors who were hoping a quick sale boom for some top marijuana companies.

Should you invest $1,000 in Spin Master right now?

Before you buy stock in Spin Master, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Spin Master wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Haris Anwar has no position in the companies mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

clock time
Bank Stocks

1 Magnificent Financial Stock Down 23% to Buy and Hold Forever

This top TSX financial stock is trading well below its recent peak, but its long-term fundamentals remain rock solid.

Read more »

dividend growth for passive income
Bank Stocks

This Canadian Bank Pays 4.75% and Could Double Your Money by 2030

A Canadian bank is a top pick for its lucrative dividend and potential to double your money in five years.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How I’d Invest $7,000 in My TFSA for $660 in Tax-Free Annual Income

Canadians looking for ways to make the most of the new TFSA contribution room should consider investing in these two…

Read more »

oil and natural gas
Energy Stocks

1 Magnificent Canadian Energy Stock Down 23% to Buy and Hold for Decades

This oil and gas producer has increased its dividend annually for more than two decades.

Read more »

Silhouette of bull in front of setting sun
Investing

Where I’d Invest $2,500 in the TSX Today

Given their solid underlying businesses and healthy growth prospects, I am bullish on these TSX stocks.

Read more »

path road success business
Dividend Stocks

How to Invest $50,000 of Tax-Free Cash as Canada-US Trade Uncertainty Escalates

Few Canadian stocks are as easy a choice as this one, making it perfect during volatile periods.

Read more »

Doctor talking to a patient in the corridor of a hospital.
Dividend Stocks

This Dividend King Paying 7.5% in Monthly Income Is a Must-Have

This high-yield TSX stock might not be a textbook Dividend King, but its reliable monthly payouts and improving financials make…

Read more »

monthly desk calendar
Dividend Stocks

How I’d Generate $200 in Monthly Income With a $7,000 Investment

Want to establish $200 in monthly income (or even more?) Here's an easy way to start today that will provide…

Read more »