While Canada becoming the first G7 nation to legalize recreational marijuana represented a boon for cannabis firms like Tilray (NASDAQ:TLRY), the long-term goal has always been breaking into the U.S. Let’s face facts. With a population of under 38 million, Canada just doesn’t have the economic clout that stakeholders of TLRY stock are looking for.
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Instead, with one fell swoop, the U.S. could essentially become the mecca of the botanical industry. Currently, under the Agriculture Improvement Act of 2018, hemp-based products like cannabidiol (CBD) are legal. Because they contain only a trace amount of tetrahydrocannabinol at maximum, CBD doesn’t fall under federal restrictions.
Then again, because it doesn’t give you a high, many botanical connoisseurs don’t consider CBD to be the real deal. That puts a damper on TLRY stock.
Seemingly, management understands this. That’s probably at least part of the reason why Tilray pursued a complicated deal to acquire convertible debt for cannabis retailer MedMen Enterprises (OTCMKTS:MMNFF). Because cannabis is illegal at the federal level, Tilray can’t fully acquire MedMen until there is a breakthrough.
On paper, the move appears like a powerful statement of intent, boding well for TLRY stock. In addition, a survey by BloomandOil.com revealed that should legalization occur, many Americans are willing to open their wallets for cannabis products. As an example, “35% of respondents said the legalization of marijuana led them to move to the state in which they currently reside.”
Further, 36% of respondents would not move to a state where marijuana is illegal. Though it seems like such a trivial matter to base such an important life decision on, I think that’s also the point. People here feel very strongly about cannabis, enough so that they will indeed revolve their most important choices around it.
Legalization Is No Gimme for TLRY Stock
You probably couldn’t ask for a better backdrop for TLRY stock. If legalization materializes in the U.S., Tilray will enjoy market demand that may be more robust than initially anticipated. If what BloomandOil.com is stating is true, it implies that cannabis represents a core need for millions of American users.
Further, the strong backdrop of demand justifies Tilray’s acquisition of MedMen’s convertible debt. Keep in mind that MedMen isn’t a unanimous first choice for an acquisition target for Tilray. Nevertheless, if the federal government decides to fully legalize cannabis, the company would have a sizable footprint ready to go. That’s excellent news if you’re holding TLRY stock for the long term.
But just how long will you have to hold shares? Like many Americans following the political process, I believed that Democrats winning the White House and controlling Congress would be a compelling milestone for the cannabis industry. Now, I’m beginning to have some doubts.
Don’t get me wrong. I think you’ll have a better chance of legalization through a Democratic administration than a Republican one. But sensing how President Joe Biden – a moderate amid a growing chorus of progressives – doesn’t seem willing to rock the boat on multiple agenda items, I don’t think you’re going to get legalization out of him.
Without casting aspersions on his age, the truth can’t be avoided: he’s old. And when you’re at that advanced stage in life, I imagine you start thinking less about your life and more about your legacy. I’m starting to have a hard time believing that he – or any individual in their golden years – wants to be the one person that legalized what was once considered a narcotic.
It just seems to have very little upside.
If No Legalization, Then What?
Let’s say that legalization just doesn’t arrive for years upon years. That raises the question – was the MedMen move a wise one?
If I were to read between the lines, Tilray’s leadership team seems optimistic that the U.S. will fully legalize marijuana. I hope for their sake that it pans out. But I also think it’s a big risk to take because you’re dealing with the unknown.
This reminds me of Workhorse (NASDAQ:WKHS) and its bid to win the U.S. Postal Service’s contract to replace its aging mail carriers. Many if not most people thought that Workhorse was a shoo-in because it offered the only full-electric solution. I took the cautious contrarian view and I happened to be correct.
Whether you’re talking weed or electric vehicles, there’s a danger in being so focused toward a particular outcome that you blind yourself to the risks. That’s not to say that TLRY stock isn’t a buy or anything. But you should acquire shares because you believe in the business as is, not for what could be if something near-miraculous occurs.
Because at this point, we just might need a miracle to get full legalization on the table.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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