Yahoo Finance Why Cannabis Stocks Should Be on the Top of Your Buy List
Written by Amy Legate-Wolfe at The Motley Fool Canada
Cannabis stocks have been the biggest winners and also the biggest losers over the last five years. Since 2017, shares have been a roller coaster for most investors. At first many worried they were too late to the game. Now, the opposite fear is true.
But if you’re a long-term Motley Fool investor, it’s not too late to get into cannabis stocks. You just have to be very selective. The cannabis industry is set to explode in the coming years as the U.S. comes on board. And it’s why certain cannabis stocks should be at the top of your buy list.
The emerging market
The cannabis industry was worth about US$20.5 billion in 2020, with 2021 estimated to grow to US$28.3 billion. Furthermore, estimates clock it in at reaching US$197.7 billion by 2028. That’s a compound annual growth rate of 29% between 2020 and 2028.
That is insane growth for cannabis stocks. And yet there is still such a hold up with investment. So what’s the problem? The market is still in the emerging phase. And a huge part of this comes down to federal legalization. Especially in the United States.
There are currently 35 states that have legalized medical marijuana, with 16 legalizing it for recreational use. So the move toward its general use has already changed drastically. In Europe it’s a similar scenario, with many European countries legalizing it for medical use, though we’re still waiting on legalization for recreational purposes.
But that’s exactly why now is the time to buy up cannabis stocks.
Which cannabis stocks?
Here’s the key question. Investors need to identify cannabis stocks that have a solid future on a global scale. And that doesn’t simply mean who can create the most pot at the lowest price. It comes down to partnerships, advertising, cost savings, mergers, and of course where these companies put their focus around the world.
The cannabis industry remains a complex place. And that’s what makes it difficult for many companies to set up in the hopes of future legalization. You can perhaps start with cannabidiol (CBD) sales, which is legal in much of the United States. But how long can you do that and hope for legalization? That’s the question many cannabis stocks and their investors have right now.
The best options
For me, the best options are those looking at this with a long-term view. In that case Tilray (TSX:TLRY)(NASDAQ:TLRY) and Canopy Growth (TSX:WEED)(NASDAQ:CGC) are probably the best bets. Tilray, for its part, has been going through a spending spree, acquiring companies at an ultra-low cost. That first included Aphria, and now includes Hexo.
Tilray purchased US$211 million in debt from Hexo, creating a “strategic alliance” between the two that would see up to $50 million of production efficiencies in the next two years. This helps lower costs for Hexo, and creates more product for Tilray stock. So among cannabis stocks, this one clearly has a growth through mergers and acquisition strategy that thus far seems to be working. Tilray is one of the few cannabis firms actually producing a profit.
Then there’s Canopy Growth. Here’s where things get tricky. Tilray proved profit is possible. Meanwhile, Canopy seems to have grown too big, too fast. This was seen with it touching practically every sector of the cannabis industry. That was cool when Canopy Growth stock traded in high double digits. Now at 52-week lows, not so much.
So Canopy Growth stock instead has a few things in place. First, it sold off its German marijuana producer for some cash flow. Now, it’s focusing in on what’s actually creating a profit. But it also has partnerships in place to acquire cannabis companies for when U.S. legalization occurs.
Bottom line
Cannabis stocks aren’t for the faint of heart, I grant you. But what investors looking a decade down the line have to think of is whether they take this opportunity, or squander it. A decade from now, this will be an industry of massive proportions, and these two companies are likely to be at the forefront. Sure, it’s going to take a while. But the sooner you get in, the more you’ll make a decade down the line.
The post Why Cannabis Stocks Should Be on the Top of Your Buy List appeared first on The Motley Fool Canada.
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Fool contributor Amy Legate-Wolfe owns Canopy Growth Corp and HEXO Corp. The Motley Fool recommends HEXO Corp.
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