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Why This Pot Stock Could Be the Best Long-Term Buy

In 2017, marijuana stocks were a big story, and companies like Canopy Growth Corp. (TSX:WEED) and Aurora Cannabis Inc. (TSX:ACB) saw their values skyrocket, with the latter quadrupling in value thanks in large part to the news that it was looking to acquire CanniMed Therapeutics Inc., although not without a little drama along the way.

How far the stocks will continue to grow will be dependent on how successful legalized marijuana will be in keeping consumers from the black markets. A big hurdle will be the price of the product, and with taxes making cannabis more expensive, consumers may be more inclined to continue simply buying from non-licensed marijuana growers.

That’s only one reason of many as to why demand may stay in the black market, and some investors may simply be assuming that sales from the underground will now flow through to legal outlets, and that’s a big leap. While we see estimates around how big the size of the market is for pot, it’s hard to determine just how much of a market share legal cannabis producers will be able to secure.

Medical marijuana, as well as cannabis that contains low amounts of tetrahydrocannabinol (THC), will be able to avoid taxes being levied on their sales. In the Liberal government’s latest budget, more information was revealed regarding the taxation of marijuana, and while the original plan to levy an excise tax remains in place, medicinal pot looks to be spared from that.

This is a big win for companies like MedReleaf Corp. (TSX:LEAF) that produce cannabis for medicinal purposes, as it will keep prices low, which will help attract potential customers.

Opportunity for pharmaceutical companies

Pharmaceutical drugs that are cannabis-based and that are obtained via prescription will also be able to avoid taxes, which could entice pharmaceutical companies to take on more of a presence in the industry.

We’ve already seen Shoppers Drug Mart secure deals with cannabis suppliers to sell pot online, and the pharmacy chain could be a great way for pharmaceutical companies to reach cannabis users. Although we’ve yet to see that avenue explored, it appears inevitable at this point.

Medical marijuana is a safer investment over recreational pot, and that might also provide the segment with more upside as well.

Other factors that will impact growth

Medical marijuana will have more stability than recreational pot because it’ll be regulated less harshly since it will target a different type of user. Those looking for the medical benefits of cannabis, including pain relief, also won’t easily turn to the black market to fill their needs, as having a safe and trusted product will be more important to this type of consumer than it would be for recreational users that are mainly looking for a high.

With fewer regulations, and the black market being less of a factor, it will be much easier for medicinal marijuana to grow over the long term than it will be for recreational pot.

Bottom line

In the short term, recreational pot stocks will see a lot of growth once legalization happens, but if you’re looking to minimize your risk exposure and are willing to trade short-term gains for long-term stability, then medical marijuana stocks would be a better fit for your portfolio.

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Fool contributor David Jagielski has no position in any of the stocks mentioned.

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