Marijuana Stocks Take the Long-Term View. But Expect ‘Teething’ Problems.

Canada-based marijuana companies have seen slower growth this year than investors had expected. In a note to clients on Thursday, Jefferies analyst Owen Bennett said companies explained that a major factor was the need to build a supply chain from scratch.

“There was bound to be teething problems,” he wrote. “The lack of retail stores at present has also been a key headwind.”

Still, companies weren’t too concerned going forward. They argued that they should see exponential growth from demand. “They said only if no one wanted the product then there would be a problem,” Owen wrote.

Why international markets aren’t yet accelerating

Companies told Bennett that international markets “look like Canada years ago.” They said growth was affected by “a lack of physician and consumer education.” That will take time to develop, they said.

When Canadian growers comes knocking

Canadian marijuana companies have mostly stayed out of the world’s largest market because the drug is illegal in the U.S. at the federal level—although it is legal in some states—and that prevents them from being listed on either the New York Stock Exchange or Nasdaq. That absence has given companies in states where cannabis has been legalized to lay the groundwork for a future where pot is legal throughout the U.S. They include growers such as Harvest Health & Recreation and Green Thumb Industries.

U.S. growers told Jefferies they are trying to establish themselves before the bigger Canada growers come and attempting to create “large moats” to keep Canadian companies from establishing a presence.

It may not be effective. On Thursday, Canada’s Canopy Growth announced a deal to acquire full ownership of U.S. grower Acreage Holdings, which would be completed when cannabis production and sale becomes legal at the national level in the U.S.d States.

Growers also said that proposed legislation in Congress that would end federal interference in states that have legalized cannabis is stalling because lawmakers might want to take it a step further and legalize marijuana federally.

How growers hope to become household names

U.S. growers believe that products containing cannabidiol, or CBD, which Congress legalized in December, can be translated into brand loyalty when they can start selling products containing THC, Bennett wrote.

“For many CBD consumers they will make the transition with an established brand (i.e. a lotion they are already using that just adds CBD),” he wrote. Growers believe consumer data will be critical in creating brands and building brand loyalty.

CBD products include lotions and sprays that are said induce a calming effect but don’t contain THC, the psychoactive ingredient that produces a high. The U.S. Food and Drug Administration’s rules don’t allow CBD to be added to food, but it will soon hear from experts and evaluate the rule. It has scheduled a public hearing for May 31.