Canadian Pot Stocks Set to Benefit From U.S. Pot Legalization
There’s often a false dichotomy made between U.S. marijuana stocks and Canadian marijuana stocks—namely, that if one segment of the market goes up, the other will go down.
But it isn’t a zero-sum game, as evidenced by three top Canadian pot stocks: Cronos Group Inc (NASDAQ:CRON), Canopy Growth Corp (NYSE:CGC), and Tilray Inc (NASDAQ:TLRY)
First, here’s some context for the state of the marijuana industry.
Canada was the first major economy to legalize recreational marijuana federally. That, in turn, started a frenzy in the stock market, with the nascent marijuana industry pretty much overnight becoming valued well into the billions of dollars in anticipation of the Canadian legal pot market opening.
The valuations only continued to swell as time went on. Some of the larger marijuana companies even attained valuations that were larger than the entire Canadian marijuana market. That led many detractors to label the industry as overvalued.
I disagreed then, and I disagree now.
Sure, taken at face value, the high valuations were grossly inappropriate. You don’t need to be a math whiz to figure out that, if your company is worth more than the entire market it operates in, something doesn’t add up.
But the thing is, Canadian marijuana stocks were never just valued based on the current pot Canadian market; the larger global pot market was always figured into the valuations.
And that brings us to the three Canadian pot stocks I mentioned earlier: CRON stock, CGC stock, and TLRY stock.
Chart courtesy of StockCharts.com
Cronos stock, Canopy Growth stock, and Tilray stock are all major Canadian marijuana stocks that have solid stakes in the U.S. marijuana market, making them exciting opportunities for investors who are looking to gain exposure to what will likely be the largest source of growth in the industry.
After all, while the U.S. marijuana market isn’t close to seeing federal legalization, there are few, if any, who believe that the country will maintain its pot prohibition forever. Each passing year, more and more states legalize the drug for both recreational and medical purposes.
What’s more, the conversation around marijuana legalization in the U.S. has changed significantly. Whereas before, it was a bit of a fringe issue not warranting much discussion on the national stage, today, legalization is pretty much standard policy for most prominent Democrats, while many Republicans are similarly supportive of pot legalization.
And, of course, we have the fact that legalization of marijuana is overwhelmingly popular among U.S. citizens, garnering well over 60% support in many polls.
Therefore, Canadian pot stocks that are able to carve out a position in the U.S. in anticipation of federal legalization are the ones that investors ought to keep an eye on.
And while Canadian marijuana stocks can’t be listed on major U.S. stock exchanges due to regulations prohibiting companies that deal in illegal goods, the companies can still make investments and plans to establish operations in the U.S. in anticipation of federal legalization.
Cronos Group Inc has made a recent play for the U.S. market with its arrangement to invest in PharmaCann, a large U.S. cannabis company that operates across the U.S.
The deal sees Cronos gain the option to acquire a 10.5% stake in the U.S. company, which has operations in six states. (Source: “Marijuana Stocks Fall as Canadian Firms Make More U.S. Inroads,” Investor’s Business Daily, June 14, 2021.)
Cronos Group Inc said the option would be exercised based on a number of factors, “including the status of U.S. federal cannabis legalization, as well as regulatory approvals, including in the states where PharmaCann operates that may be required upon exercise.” (Source: Ibid.)
The deal ran Cronos about $110.4 million for the option.
“We were attracted to PharmaCann as an investment because of their disciplined capital allocation, strong track-record and compelling licensed manufacturing and retail footprint,” said Kurt Schmidt, CEO of Cronos Group Inc. (Source: Ibid.)
Should the option be exercised, Cronos would be able to move its goods through the 23 shops operated by PharmaCann. In other words, this deal provides CRON stock an opportunity to get a jumpstart on the U.S. market when federal legalization eventually arrives.
Tilray Inc, which has been on fire in 2021 due to its merger with Aphria Inc., also has a U.S. connection—through its acquisition of Manitoba Harvest, which sells hemp granola and cannabidiol (CBD) products in the U.S.
Aphria Inc. had also previously acquired SweetWater, a U.S. marijuana-lifestyle-branded beer company. That has opened the possibility for Tilray to look into cannabis-infused beverages. (Source: Ibid.)
Canopy Growth Corp, meanwhile, has an option to acquire a U.S. marijuana company. In CGC stock’s case, it’s Acreage Holdings Inc. (CNSX:ACRG.A.U, OTCMKTS:ACRHF).
All three of these Canadian pot stocks have gone up in the past month, with both CRON stock and TLRY stock up by about 17%. These companies are set to see growth as they continue to make bold moves that position them for continued success.
The future of the marijuana market isn’t tied down to a single country. Companies that take an international approach to what’s going to be a global industry in a matter of years are the ones that are likely to see the largest gains.
Canadian marijuana companies that invest toward that future are the ones I believe show the most promise. For investors who are looking to make long-term buy-and-hold moves, I believe they could do a lot worse than Cronos stock, Canopy Growth stock, or Tilray stock.
The three companies are set up for gains in the short term as they expand in the Canadian market and increase their revenues. They could see even more gains in the future as they prepare to enter the U.S. market when marijuana goes legal at the federal level.