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Why Canopy Growth, Tilray, and Hexo Stocks Dropped

By Rich Smith – Oct 20, 2021 at 1:02PM

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Buy the rumor, sell the news?

What happened

After glowing a healthy shade of green yesterday, marijuana stocks are wilting on Wednesday, with shares of Canopy Growth (CGC -7.01%) down 2.6%, Tilray (TLRY -4.48%) tumbling 2.8%, and Hexo (HEXO) off a more disturbing 6.7% as of 11:30 a.m. EDT.

And if you ask me, this looks like a classic case of investors deciding to "buy the rumor, sell the news."

Three arrows trending down over a background of a map and dollar signs.

Image source: Getty Images.

So what

News from Mexico, to be precise. Yesterday, investors snapped up shares of Canopy Growth, which rose 8.6%, and Tilray and Hexo as well -- up 15.8% and 14.8%, respectively. Today, they're cashing in some chips as Marijuana Moment reported that, as the U.S. Congress dithers, Mexico is moving ahead with marijuana legalization, and Mexican Senate President Olga Sánchez Cordero says legislation to legalize it could arrive within "the coming weeks or months."

Granted, the Mexican Supreme Court declared laws outlawing marijuana possession to be unconstitutional nearly three years ago, and the justices voted to decriminalize the drug this past June. But these measures have stopped short of an actual law "aimed at eliminating prohibitionism and guaranteeing the safety and control of consumption based on proper regulation," said the senator.

Now what

Marijuana legalization is expected to free up "a multimillion dollar market nationally and internationally, which could be beneficial for the economic reactivation of our country," said Senate Majority Leader Ricardo Monreal Avila -- and generate as much as $1 billion a year in tax revenue for the country.

So the market here could be huge. That being said, there are still risks to consider. For one thing, it's unknown how long it would take such legislation to actually pass. And Sen. Monreal Avila also noted that "some modifications" may still be needed to draft legislation that almost passed in Mexico last year, which could add further delays.

Perhaps most importantly, investors need to remember that legalization in Mexico doesn't guarantee that marijuana will be profitable for American investors. Despite the drug already being legal for sale in Canada, and across much of the United States as well, Hexo lost $174 million in the marijuana business over the past year, Tilray lost $375 million, and Canopy Growth? It lost more than $1 billion!

After seeing numbers like those, you might even think investors are smart to decide to "sell" this news.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends HEXO Corp. The Motley Fool has a disclosure policy.

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