The Motley Fool

Cannabis Stocks: Ignore Short-Term Losses for Long-Term Returns

Jars of marijuana
Image source: Getty Images

The beginning of 2021 was off to a good start with cannabis stocks. A new president of the United States made a commitment to decriminalizing marijuana use. This seemed to set the stage for eventual legalization. And that hasn’t changed. Shares of cannabis stocks bolted upwards, only to experience a pullback similar to other industries.

And that’s where we remain today. Marijuana-focused exchange-traded funds (ETFs) went from February highs to drop by 40% to today’s numbers. And even with more and more states legalizing marijuana for medical use, now in 37 states, and recreational use in 18 stages, it remains federally illegal.

So what?

Motley Fool investors might be saying to themselves, “Why do I care about American legalization? I live in Canada!” But without access to American legalization, Canadian producers stand little chance of reaching peak production. The marijuana industry could be enormous, but United States legalization is the key for cannabis stocks.

Canadian cannabis stocks stand the chance in the meantime to set up shop in the United States and play a waiting game. U.S. cannabis producers are trying the same, but are restricted to growing what’s legal in their states. Banks often don’t want to deal with these companies given the legal ramifications. And U.S. cannabis companies largely still cannot be listed on the larger U.S. stock exchanges.

What’s happening?

So, while Canadian cannabis stocks wait around, they’re spending like mad. This includes major Canadian cannabis producers Canopy Growth (TSX:WEED)(NYSE:CGC) and Tilray (TSX:TLRY)(NASDAQ:TLRY). Canopy Growth stock has been buying up United States producers in an acquisition frenzy for years. Tilray stock, meanwhile, made the major move to acquire Aphria. This created a titan in the cannabis stocks industry. And now, Canopy and Tilray are battling it out for the top spot.

When Canopy Growth stock reported its earnings last week, management remained confident that it continues to hold the top spot in the “tracked Canadian recreational cannabis market,” even with Tilray stock edging in. But while the company saw revenue increase 23% year over year, most of the earnings report focused on an approach to wait and see when they’re in the U.S.

But it’s not all bad news from this spending. Buying up these strong U.S. producers gives Canopy Growth stock and, indeed, Tilray stock the opportunity to see revenue rise. Both were forced to make massive cuts when the pandemic hit, and the cannabis producers have been focused on profits ever since.

Now what?

For Motley Fool investors interested in cannabis stocks, it’s a great time to buy. Sales in the U.S. for legal cannabis reached US$17.5 billion last year, jumping 46% from 2019. By 2026, those sales could reach $41.3 billion, jumping 136%! In Canada, sales reached $2.6 billion in 2020 and could almost triple to $6.4 billion by 2026.

So, it’s clear that while there is growth in Canada, it’s nothing compared to what’s bound to happen in the United States. If Motley Fool investors are looking to add a bit of cannabis stocks to their portfolio, I would simply just keep it on the low end. Never put more than 5% to 10% in your portfolio. And while Canopy Growth stock and Tilray stock are great options, there are also plenty of ETFs that focus on cannabis stocks.

Canopy Growth stock is down 65% since February highs. Tilray stock is down 28% since June. Now is a great time to buy during this massive pullback, as the economy rebounds. If you’re a patient investor, these cannabis stocks remain an undervalued area that could one day become a gold mine.

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 Amy Legate-Wolfe owns shares of Canopy Growth Corp. The Motley Fool has no position in any of the stocks mentioned.

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