There’s no doubt that the cannabis industry has plenty of potential upside. With more markets worldwide legalizing cannabis for medicinal or recreational use, companies aiming to target international growth have more opportunities.
Canadian investors interested in cannabis stocks saw a massive boost with the announcement of the Biden administration across the border announcing the decision to classify marijuana as a less dangerous drug. Combined with the news that Germany might legalize marijuana as well, shares of the top TSX marijuana stocks soared.
Between April 1 and April 30, 2024, shares of Canopy Growth (TSX:WEED) doubled in price. Between April 29 and April 30, shares of Tilray Brands (TSX:TLRY) climbed 41%. However, going all-in might not be the smartest investment decision despite the seemingly positive news.
Getting too excited for legalization
This is not the first time shares of cannabis companies soared due to legalization announcements. The Canadian cannabis giants saw a massive rise in share prices when the Canadian government made their plans to legalize marijuana in Canada just a few years ago. Many can argue that Canadian investors became too excited and bought too much of the shares in these companies.
As the dust settled and it became clear that these companies did not have the fundamentals to support such high valuations, cannabis stocks came crashing down. There is an inherent volatility in the cannabis industry that investors ignored previously. The recent surge in share prices suggests that they are making the same mistake.
Cannabis reform is not a solid bet
Legalization in Germany might have more solid prospects, but the same cannot be said for the United States. With growing evidence suggesting that marijuana has no place as being classified as a dangerous drug, marijuana reform might be on the horizon. Unfortunately, it might be much further than people think it is.
Canopy Growth, Tilray, and other Canadian cannabis giants will undoubtedly see business soar when the market truly opens up in the United States. However, the development might not come as soon as we think. A reform could just mean that marijuana will become decriminalized across the border.
There is no clear timeline for it to become legalized across the country for recreational use. Legalizing marijuana completely in the U.S. will be an incredibly complex and time-consuming process.
Additionally, there are plenty of hurdles to overcome, including advertising rules, minimum-age requirements, taxes, and the inherent nature of the businesses themselves. Cannabis companies are still burning through cash without reporting significant profits in the domestic market. There might not be much of a change in the cash burn even after new markets open up across the border.
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Foolish takeaway
Perhaps the biggest point of concern for Canadian investors interested in cannabis stocks due to legalization in the U.S. is the elections. It is important to remember that the Biden administration has made the announcement to reclassify marijuana as a Schedule III substance instead of being in the same category as heroin.
If Donald Trump gets re-elected, it is not impossible for him to completely torpedo the move. Canopy Growth and Tilray, depending on legalization in an uncertain market, should not inspire too much confidence, in my opinion. Investing in Canadian blue-chip stocks in other sectors of the economy might be a safer way to put your capital to work.
