Artificial intelligence (AI) stocks have been among the best investments you could have owned in your portfolio over the past few years. Nvidia has generated an incredible 675% gain in just two years and has led the AI charge in the markets. It's still a hot buy right now as investors expect more growth from the business in the future.
But Nvidia and many other AI stocks now trade at significantly larger valuations than they did a few years ago. And those high prices can make it much more difficult to earn a strong return from here on out. At the same time, these high-priced stocks are vulnerable to slowing market conditions and have more room to fall during a downturn than more moderately valued investments.
Now may be a good time for investors to consider other growth stocks and opportunities, which may have a lot more upside in the long run. One underrated sector to focus on today is cannabis.
Cannabis stocks have been struggling for multiple years
To be clear, cannabis stocks haven't been doing well of late. In two years, the AdvisorShares Pure US Cannabis ETF (MSOS 2.49%) has lost half its value. Despite the fund giving investors access to some of the best pot stocks in the industry, including names such as Curaleaf Holdings and Trulieve Cannabis, it hasn't been able to attract much interest.
Investors have grown impatient with a lack of progress in efforts to fully legalize marijuana. While there's talk of potentially rescheduling cannabis so that it will no longer be considered as harmful as heroin, LSD, ecstasy, and other Schedule I substances, that would fall well short of legalization and wouldn't solve the industry's problems.
Legalization would create a more favorable landscape for the industry, where companies from other industries wouldn't be as hesitant to invest in cannabis and pot producers could have an easier time borrowing money from banks. This could facilitate much more growth and lead to better revenue and profit numbers, making cannabis stocks better buys. Unfortunately, that isn't happening anytime soon, but there's hope that there could be change on the horizon.
NYSEMKT: MSOS
Key Data Points
Why a presidential election could revive the industry
The upcoming presidential election could provide the cannabis industry with a catalyst. Marijuana legalization could be a hot topic this year, given that the majority of Americans (57%) are in favor of legalizing both medical and recreational marijuana use, according to data from the Pew Research Center. For politicians, it could be an opportunity to win over voters by focusing on the issue.
2024 U.S. Democratic presidential candidate (and current Vice President) Kamala Harris said she is open to the idea of marijuana reform, including rescheduling cannabis and outright legalization. She's also admitted to trying pot in the past.
Even former president and 2024 Republican presidential candidate Donald Trump appears to be accepting of cannabis use. In a recent interview, when talking about Florida potentially legalizing marijuana, he said the state doesn't need to "ruin lives and waste taxpayer dollars arresting adults with personal amounts of it on them." It's a positive sign that he could be more open to the idea of marijuana reform if he's elected president.
Regardless of which candidate wins the upcoming election, there could be hope for marijuana legalization in the not-too-distant future, and that optimism could fuel pot stocks' performance.
Should you add pot stocks to your portfolio?
Investing in pot stocks will require taking some risk, which is why it's not a suitable option for many investors. While there's upside potential, a lot hinges on legal reform, which adds an extra layer of uncertainty and risk to the equation.
But if you're willing to accept that, then buying shares of a diversified ETF, such as the AdvisorShares Pure US Cannabis fund, can be a good option. With this fund, you could have exposure to some of the top cannabis stocks in the U.S. that would benefit from any type of marijuana reform.
Pot stocks have taken a beating in recent years. However, if political candidates bring up the prospect of marijuana legalization, it could drive some much-needed bullishness to the sector and may get those stocks rallying again. Should reform take place, there could be even more upside for cannabis stocks in the long run.
