Canadian pot shares drop as U.S. cracks down on marijuana crimes

Stocks in Canadian pot companies were lower Thursdayafter the U.S. federalgovernment rescinded an Obama-era policythat allowed legal marijuana to flourish in states across thecountry.

U.S. Attorney General Jeff Sessions saidin a memo thatfederal prosecutors shoulddecide on their own whether to devote resources to marijuana casesbased on other demands in their districts.

Sessions wrote that "prosecutors should follow the well-establishedprinciples that govern all federal prosecutions" by considering theseriousness of the crime and its impact on the community.

It is not immediately clear how the decision will impact pot sales, which are legal at the state level in eight states, and in Washington, D.C.

A 2013 memo signed under the administration of Barack Obama had allowed the pot industry to flourish in the handful of states that were movingto legalize marijuana at the time, and encouraged other states to join their ranks. On Jan. 1, California became just the latest U.S. state to legalize recreational marijuana use, joining eight others that have done sounder certain limitations.

The Obama-era memo reserved the right to prosecute if states didn't implement basicsafeguards to keep the drugs out of the hands of kids and organized crime.

The new Sessions policyraises the possibility that pot companies that currently operate largely free of legal problems may suddenly face them.

It effectively means an unspoken promise that the federal government wouldn't get involved prosecuting marijuana crimes instates with legal pot unless there were egregious activities is now over.

"This is a victory,"said Kevin Sabet, president of Smart Approaches to Marijuana, who was among several anti-marijuana advocates who met with Sessions last month."It's going to dry up a lot of the institutional investment that has gone toward marijuana in the last five years."

Pot stocks sell off

It didn't take that long for the investment impact of the news to filter into Canadian pot companies, which have been on a tear of late in anticipation of plans to legalize the drug in Canada later this year, possibly giving them a leg up to start selling more in the larger U.S. market once more states legalize.

The biggest pot company in Canada, Canopy Growth Corp, dropped almost 10 per cent on the TSXto hit $32.32. Prior to the sell-off, Canopy's value hadroughly tripled since October.

Another major player, Aurora Cannabis, lost eight per cent to close at $13.04. Aurora has done even better of late, however, after having quadrupled since the start of November.

Aurora has become the latest target of short seller Andrew Left of Citron Research, who questioned the company's accounting on Thursday and said it has no path to profitability and should be worth half what it is today.

Profit taking

The TSX-listed HorizonsMarijuana Life Sciences ETF, which includes those two companies and many other pot stocks, was off by 8.7 per cent on Thursday after gaining for the previous several days.

Still, ChrisDamas, editor of investment newsletterTheBCMICannabis Report, says Thursday's sell-off has more to do with the recent run-up than it does with any new fears from the U.S.

"After six trading days of parabolic up moves in the leading Canadian cannabis stocks, it didn't take much to trigger profit taking," Damastold CBC News in an email.

Damassays the U.S. laws are unlikely to impact any of the major Canadian players, adding that they may actually be poised to do better if the U.S. heightens prohibition.

"My feeling is Sessions wanted to take some of the enthusiasm away from headlines thatCaliforniathe nation's most populous state had begun legal recreational cannabis sales with gusto on Jan. 1," Damas said.

"We at the BCMI Cannabis Report are expecting further downside in the major and junior Canadian cannabis stocks and are closely tracking both short selling and insider sales."