Could This Be the Catalyst Cannabis Stocks Desperately Need?

© Provided by The Motley Fool Could This Be the Catalyst Cannabis Stocks Desperately Need?

It’s a tough time to be holding stocks, and it’s even tougher if you have cannabis stocks in your portfolio. The entire sector has been in shambles as valuations are falling hard. Major cannabis producer Canopy Growth was worth more than $10 billion last year; right now, its valuation is struggling to stay above just $1 billion. The Horizons Marijuana Life Sciences ETF has crashed 64% in 12 months.

But the good news is that stocks in the cannabis industry can sometimes pop on news of legalization in a major market. Even though it may not necessarily mean every business will benefit from the development, it can help shine a light on the industry’s promising growth potential and remind investors of the opportunities there.

That’s what the industry desperately needs right now — some sort of positive news to get investors bullish on the sector again. And it may not be long before it has that.

Is Germany on the cusp of marijuana legalization?

Last year, Germany elected an entirely new government under Olaf Scholz, the country’s new chancellor, succeeding Angela Merkel, who was in power for 16 years. And one industry that has been receiving lots of attention since the change in leadership is cannabis. Medical marijuana is legal in the country, but the government is now looking at allowing adult-use pot as well. And there’s plenty of incentive to go ahead with it — some estimates project it will mean more than $5 billion in tax revenue and cost savings for the country. Plus, it could create 27,000 jobs.

This would be incredibly significant: Germany would instantly become the largest country in the world to legalize the substance, plus it could lead to other European countries following suit. In 2021, Malta became just the first country in the European Union to legalize marijuana, allowing people to grow it at home and permitting personal use.

The German government is working on a draft bill to legalize marijuana, and it could potentially be approved next year.

Multiple cannabis producers could benefit from this

One company that is certainly excited about these prospects is Canadian-based cannabis producer Tilray Brands (NASDAQ: TLRY). Part of its ambitious plan to get to $4 billion in annual revenue by the end of fiscal 2024 (its year ends in May) includes generating $1 billion from the European market. Tilray currently has a medical distribution business in Germany, CC Pharma, which could help accelerate its growth in Europe. CC Pharma has a network of suppliers it works with in Europe and has “preferred access” to 13,000 pharmacies in Germany. Last fiscal year, the company’s distribution revenue (which mainly comes from CC Pharma) totaled $277.3 million for the period ending May 31. 

Tilray in total has generated just $617 million in revenue over the trailing 12 months, so hitting its aggressive targets in such a short period may be a stretch. It will definitely benefit from the opportunities in the German market, but management may be too optimistic about how well the business will do.

Another company that is targeting the area is Aurora Cannabis (NASDAQ: ACB), which calls itself “the distinct market leader in the German flower segment.” Going global has been a key focus for Aurora, which states on its website that it has a footprint that spans 25 countries.

In the period ending March 31, the company’s international medical marijuana revenue grew by 55% year over year, totaling 14.6 million Canadian dollars. The company’s key international markets include Germany, Poland, Israel, the U.K., and Australia. Unlike Tilray, Aurora hasn’t outlined an aggressive target for its European business. But without a large company like CC Pharma helping it expand, plus Aurora’s constant cash burn and need to raise money, it maintaining or growing any leadership position in the German market doesn’t appear likely in the long run.  

Is now the time to invest in cannabis?

The cannabis sector looks like a sleeping giant right now. Investors look to have given up on it, but there are some mammoth opportunities there. Once optimism returns to the sector (and Germany legalizing marijuana may do the trick), stocks could soar, as many of them look overdue for some bullishness. Buying before that happens may set investors up for big gains later on.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.