There’s a tendency to clump the entire marijuana industry together, treating all cannabis stocks as discrete parts of a greater whole. And there’s some reason for that. Since the beginning of the legal pot industry, marijuana stocks have, more or less, followed similar trends.
Which isn’t to say that all pot stocks perform exactly the same, but it has meant that, in general, the market has tended to push all cannabis stocks in one direction or the other.
Now, however, things have changed, and understanding that change is the key to profiting from marijuana stocks in 2021.
In order for me to make my case, take a look at the following two charts.
Chart courtesy of StockCharts.com
The above chart shows the performance of Canadian pot stocks Canopy Growth Corp (NASDAQ:CGC), Aurora Cannabis Inc (NYSE:ACB), and Aphria Inc (NASDAQ:APHA).
As you can see, they’ve generally followed very similar trajectories, with the main difference being one of degree.
The below chart details the performance of Innovative Industrial Properties Inc (NYSE:IIPR) and Curaleaf Holdings Inc (CNSX:CURA, OTCMKTS:CURLF), and their trajectories have been rather different than those of the three cannabis stocks above.
Chart courtesy of StockCharts.com
So what separates these two groups of marijuana stocks? Their companies’ addresses.
The first group—CGC stock, APHA stock, and ACB stock—consists of companies based in Canada. The second group—CURLF stock and IIPR stock—consists of companies based in the U.S.
See where I’m going with this?
For a long time, Canada was the leader in the legal marijuana market. And for good reason. It was the first modern economy to legalize marijuana for cultivation, distribution, and sale.
That pretty much meant Canada was the focal point of pot investors over the past few years. And those who invested early enough were generously rewarded, even through all the uncertainty.
For other investors who came late, there were still many opportunities to profit from the pot sector, but the marijuana stock market did have many fluctuations that, at times, could be punitive to ill-timed investments.
But in recent years, we’ve seen a shift toward the U.S.-based marijuana companies. Why? Because the U.S. marijuana market was always the endgame.
Canada, remember, is smaller than California in terms of population and wealth. Frankly speaking, the Canadian market is small potatoes compared to the massive U.S. market.
Analysts have always understood that fact; it’s why we sometimes saw market caps of Canadian pot stocks exceed the total value of the Canadian market. These companies weren’t being valued for what the Canadian market alone held; they were being valued for what the broader marijuana market offered in the near future.
And the U.S., at this point, is closer than it has ever been to federally legalizing marijuana. Considering how large the U.S. market is, it’s simple arithmetic to anticipate massive gains in the industry as we near federal U.S. marijuana legalization.
Which isn’t to say it’s going to happen tomorrow—or even during Joe Biden’s presidency.
But there’s a chance we’ll see federal U.S. marijuana legalization in the next few years. This is the closest that marijuana has ever been to reaching federal legalization in the U.S. in modern history.
So with that in mind, the divide we’re seeing between Canadian and U.S. cannabis stocks is basically between “old news” and novelty.
Canada was exciting when the country first legalized marijuana. That’s what caused millions of dollars in investor cash to flood the market and, if it was invested correctly, earn many people a lot of money.
The U.S., however, is exciting now. Not only is the market much larger than Canada, but we’re a point where we may legitimately see a U.S. president make a move on legalizing, decriminalizing, or even just re-classifying marijuana so it becomes a more accepted substance in the U.S.
Any one of those legislative moves would send the market into a fervor. This would benefit American marijuana stocks more, but Canadian marijuana stocks would also be lifted by the rising tide.
So that’s the best-case scenario. What about investing today? Well, one strategy would be to go long on all pot stocks, but especially U.S. pot stocks.
U.S. Cannabis Stocks Show Promise While CGC Stock Encounters Troubles
Going long on marijuana stocks could be a very solid choice. After all, it’s almost certain that, in the near future, the U.S. will legalize marijuana federally. Voters approved the legalization of the drug in every state where it was on the ballot this past November.
Moreover, bipartisan support continues to build behind pot legalization in the U.S. (and that’s saying something, considering the divisive nature of current American politics). Blue, red, and purple states are all moving toward a more weed-friendly position.
In the meantime, Canadian pot stocks like CGC stock will have to deal with the fallout of their high valuations early in the marijuana boom.
What’s more, COVID-19 has, while not really damaging the consumer market (people tend to consume alcohol and pot at steady numbers no matter the economic conditions), at the very least made growing and distribution much harder, which has hurt Canadian cannabis stocks.
Canopy Growth stock took a hit when the company closed down five locations across Canada and laid off roughly 220 employees. (Source: “Cannabis Company Canopy Growth to Close 5 Sites, Lay Off 220 people,” CBC, December 9, 2020.)
The move is supposed to save the company between $150.0 and $200.0 million as it hopes to accelerate toward profitability.
There’s no doubt that the pandemic played a part in those closures. It may not have been the only reason, but it was definitely a reason.
This, in turn, sent Canadian marijuana stocks into a bit of a dip. But as seen above, U.S. pot stocks were largely unaffected.
So that informs us about the current state of cannabis stocks. As such, be prepared for Canadian marijuana stocks to show more volatility. That would be good for day traders, but for investors looking for safer, buy-and-hold strategies, U.S. pot stocks are probably where their sights should be set.
The legal marijuana industry is going to keep growing. Of that there’s little doubt. What investors have to consider is how they can maximize their returns from the sector.
In that regard, there’s also little doubt that the U.S. marijuana market is ripening and we’re likely going to see huge gains in the next few years. Getting in during that rise could be a massive boon to an investment portfolio.