Cannabis stocks are absolutely ripping higher today. A range of Canada-based cannabis companies, including Canopy Growth (NASDAQ:CGC), Tilray (NASDAQ:TLRY) and Cronos (NASDAQ:CRON) are up more than 7% in today’s session, with Canopy Growth leading the way with a gain of almost 60%.
This move has obviously reignited excitement in a sector many investors have long forgotten about. Following Canada’s full legalization of cannabis in 2018, it’s been a long wait to see other countries follow suit. A number of jurisdictions have laws in place permitting cannabis usage for medicinal or research purposes, but recreational cannabis legalization is rare, particularly at the national level.
Today’s news that Germany has followed suit, becoming the latest major market to (partially) legalize recreational cannabis use for adults, has sent the market into a frenzy. Let’s dive into what was announced and why this shift is driving massive stock price appreciation for cannabis stocks today.
Cannabis Stocks Surge on German Legalization
As of April 1, German adults will be permitted to carry up to 25 grams of cannabis on their person, store up to 50 grams of cannabis at home, and cultivate up to three plants on their private property. There are a number of restrictions that the German government has put in place, with age-related restrictions, restrictions as to where cannabis may be consumed (not near children or sports facilities), and in terms of quantity. But overall, this law appears to be relatively liberal, encouraging cannabis clubs (with up to 500 members) which can grow and purchase the drug starting July 1.
For the aforementioned three cannabis companies, this legalization legislation is important for a number of reasons. For one, it could expedite similar movements in the U.S. (the key market these Canada-based companies are hoping to go after), with Kamala Harris and others seeking to put in place various cannabis reforms, particularly within the criminal justice system. If the U.S. market is open for business (which would likely depend on the outcome of this coming election), there’s a much greater upside for these companies in terms of their total addressable markets and growth prospects.
A Big New Market
Another key factor to consider is these companies’ existing exposure to the German market. Tilray already owns and operates one of the three existing permitted growing facilities in the country, and other cannabis producers have export agreements to help serve the medical marijuana markets. As the German market for legal weed grows, these companies’ fundamentals improve. At least, that appears to be what the market is pricing in today.
We’ll have to see how this legal change rollout proceeds. Indeed, there’s plenty of uncertainty remaining for investors. Profitability has been hard to come by, leading to stark valuation declines in recent years. But there are obvious benefits to this rule change that can’t be ignored.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
