What happened

Marijuana stocks soared on Monday, as investors grew more optimistic about the cannabis industry. Many of the largest companies enjoyed sharp gains on the day, including:

So what

Several factors likely contributed to the rally in cannabis stocks. Many investors view the stock market as expensive after its recent rally off its lows in March, and it's possible that bargain hunters are setting their sights on the beleaguered marijuana industry. Even after today's gains, many of these stocks are still well below their all-time highs. That could make some of the strongest marijuana companies intriguing to investors who are more value-focused.

A cannabis leaf.

Cannabis stocks rose sharply on Monday. Image source: Getty Images.

It's also possible that some investors are beginning to see cannabis stocks as defensive investments. If more people turn to marijuana as a way to ease their stress during the current economic downturn, cannabis stocks could rally even if the market as a whole were to fall. Moreover, if social protests lead lawmakers to legalize marijuana in more states, cannabis stocks could rally further.

Additionally, Aphria began trading on the Nasdaq stock exchange today, which could be helping to bring more attention to pot stocks.   

Now what

Despite their recent gains, cannabis stocks remain relatively high-risk investments. Most are unprofitable, and only a select few, such as Canopy Growth and Cronos Group, have strong balance sheets. Others, like Aurora Cannabis and HEXO, have been forced to dilute shareholders by selling stock in order to raise cash.

So while the cannabis industry as a whole has immense growth potential, investors should keep these risks in mind.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. 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.