Federal marijuana legalization isn't likely to happen anytime soon, regardless of who wins this year's presidential election. But it doesn't need to happen right away. Often, all it takes to move the needle for cannabis stocks -- and sometimes to turn them into scorching-hot gainers -- is for the market to start believing that eventual legalization may be inevitable.
Two stocks that often surge when there's talk of marijuana reform are Canopy Growth (CGC +2.63%) and Tilray Brands (TLRY +6.92%). They are among the most popular and recognizable pot stocks on the market, and they have a lot to gain should legalization take place.
Could their shares rally toward the end of the year?
NASDAQ: CGC
Key Data Points
In the last quarter of 2020, both stocks surged
Following the 2020 election, shares of Canopy Growth and Tilray Brands took off. President Joe Biden's election win ignited excitement that marijuana reform was around the corner, and that legalization might finally have a chance. The stock charts reflect the optimism around the cannabis industry at the time; even the broader AdvisorShares Pure US Cannabis ETF experienced a huge surge in value.
And before you think this phenomenon was simply a response to the Democrats' election win, take a look at how investors treated the marijuana industry in 2016 after the Republicans won. Canopy Growth and Aurora Cannabis (ACB +2.69%), the marquee cannabis stocks at the time, soared in the final quarter of that year too.
In that year's election, multiple states passed initiatives legalizing recreational marijuana use, leading many people to believe that legalization for the entire country could be around the corner.
In 2024, there are several states that will be voting on various ballot initiatives:
- In Arkansas, there is an initiative to expand its medical marijuana program, which would allow patients to grow cannabis at home.
- Florida could legalize recreational use. Although marijuana is only legal for medical use in the Sunshine State currently, it's already one of the largest domestic markets for the industry, and approval of recreational use could serve as a big catalyst for the industry.
- Oregon voters will determine whether cannabis workers can unionize.
- North and South Dakota voters will decide on whether to legalize recreational use in their respective states.
- Nebraska has multiple medical marijuana ballot initiatives, one of which will enable patients to use up to five ounces of cannabis, while another focuses on regulation and would permit the manufacturing, delivery, and dispensing of medical marijuana.
There could end up being more initiatives by the time November rolls around, but there is clearly no shortage of opportunities for the cannabis industry to get a whole lot bigger and for investors to remain bullish on its long-term growth prospects.
Will there be a similar type of boot this year?
The potential for marijuana reform or outright legalization could give pot stocks a boost they desperately need. In the past three years, shares of Canopy Growth, Tilray Brands, and Aurora Cannabis are all down by more than 80%.
With limited growth opportunities in Canada and a European market that's still in the early stages of development, many cannabis companies have scaled down their operations or focused on expanding into other industries in search of growth opportunities they can take advantage of without destroying their margins in hotly contested and oversaturated markets. Excitement around the idea that the U.S. market might finally open up fully would definitely generate a lot of bullishness.
Particularly after pot stocks have fallen so far in recent years, I believe that an increase in talk about marijuana legalization in the months ahead could lead to investors turning more attention to the sector. The cannabis industry is, after all, a potentially enticing one for growth investors. It's expected to grow at an annualized rate of more than 34% through the end of this decade, according to estimates from Fortune Business Insights.
Is now the time to buy pot stocks?
Pot stocks may very well end up getting a boost toward the end of the year, but whether that will be enough of a rally to erase their losses of recent years is questionable. And that potential is certainly not a convincing enough reason on its own to buy what are still highly risky investments.
Tilray, Canopy, and Aurora are unprofitable companies and they could remain that way for the foreseeable future. Their shares have proven volatile over the years, and that's not likely to change anytime soon, whether legalization happens in the U.S. or not.
If you're willing to take on some risk and hang on for the long term, this could be an opportunity to buy pot stocks at some attractive valuations, but you need to brace for a potentially bumpy ride that could last for years. One of the safer options for those looking to put money into the space may be to invest in an exchange-traded fund that gives you broad exposure to the cannabis industry.
