Why Marijuana Legalization Shouldn’t Be the Big Story for Cannabis Companies

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    Even if legalization takes place, it won’t solve the problems of many cannabis producers, particularly those based in Canada.

    This month, President Joe Biden signed a stand-alone bill on marijuana reform (focused on research) into law, making him the first U.S. president to do so.

    But that doesn’t mean marijuana legalization is on the horizon. And it’s definitely not a reason to buy up shares of marijuana companies. Unfortunately, many marijuana stocks can be volatile and move on such news.

    Here’s why you shouldn’t let news relating to marijuana legalization or reform affect your investing strategy for the industry.

    Real marijuana reform is likely years away from happening

    Passing a marijuana research bill is positive news for the industry, but it might not have any effect in the short term. Marijuana legalization is a complex issue that will require lots of back-and-forth before it ever gets passed.

    And with the Democrats losing control of the House in the recent midterm elections, it’s even less likely that significant reform will take place anytime soon, as it would require support from a Republican party that has traditionally taken a hard stance on drugs. This is why I would be surprised if, over the course of the new two years, there is any progress on marijuana legalization in the U.S.

    The problem in the industry is that any time there’s any positive news, it can often send pot stocks soaring. However, that shouldn’t matter, particularly when the businesses that are rising in value have disastrous financials and aren’t in great shape.

    It’s the fundamentals that should matter to investors

    Two stocks that often see a lot of excitement when there’s positive marijuana news are Tilray Brands (TLRY 8.22%) and Canopy Growth (CGC 7.26%). Both companies are eager to enter the U.S. market, and it’s often mentioned as a key part of their long-term growth plans.

    However, neither of these businesses looks good on its own right now. Tilray has incurred a net loss of $508.6 million over the trailing 12 months, while Canopy Growth’s losses total nearly 3 billion Canadian dollars over a similar period. Both companies have also struggled to generate any positive growth of late.

    TLRY Revenue (Quarterly YoY Growth) Chart

    TLRY REVENUE (QUARTERLY YOY GROWTH) DATA BY YCHARTS

    In the long term, these trends could reverse, especially if the U.S. marijuana market opens up. Although, Tilray and Canopy Growth may also end up spending more as a result of the new opportunities, and as a result, they could end up getting even deeper in the red.

    Examples of safer pot stocks are ones that are already operating in the U.S., such as Curaleaf Holdings and Green Thumb Industries. These are businesses that are generating more in revenue than both Tilray and Canopy Growth and have bottom lines that are also less volatile and in better shape.

    TLRY Net Income (Quarterly) Chart

    TLRY NET INCOME (QUARTERLY) DATA BY YCHARTS

    Cannabis investors are better off buying U.S.-based stocks

    The danger of investing in Canadian-based marijuana companies like Tilray and Canopy Growth is you end up betting on when legalization will take place in the U.S. because growth in other parts of the world simply isn’t as appealing. But in the meantime, these companies are incurring losses and burning through cash. Even if you believe legalization will take place within a few years, companies like Canopy Growth and Tilray may be in much worse positions to compete with multi-state operators (MSOs) that already have positions in the U.S. market.

    MSOs have more upside because not only are they doing better today, but they could also benefit from a sharp increase in price once they are able to list on a major exchange like the Nasdaq or NYSE, which will be possible once marijuana becomes legal in the U.S.

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