U.S. Markets close in 3 hrs 5 mins

Why Marijuana Stocks Canopy Growth, Cronos Group, and Tilray Crushed It Today

Keith Speights, The Motley Fool

What happened

The three Canadian marijuana stocks that currently trade on major U.S. stock exchanges enjoyed big gains on Monday. Shares of Canopy Growth (NYSE: CGC) were up 14% as of 3:48 p.m. EDT, while Cronos Group (NASDAQ: CRON) and Tilray (NASDAQ: TLRY) jumped 18.9% and 12.1%, respectively.

Two of the three marijuana growers reported new developments earlier in the day. Canopy announced an agreement to acquire all of the assets of Colorado-based hemp researcher ebbu, Inc. Cronos announced a deal with the Technion Research and Development Foundation of the Technion – Israel Institute of Technology to research the use of cannabinoids in skin diseases. 

However, the primary catalyst for all three stocks appears to be mounting anticipation of the Canadian recreational marijuana market opening on Wednesday, Oct. 17. Canopy, Cronos, and Tilray will be major players in this new market.  

Canadian red maple leaf surrounded by marijuana leaves

Image source: Getty Images.

So what

It certainly makes sense that investors are excited about the launch of recreational marijuana in Canada. Only one other country has legalized recreational marijuana nationwide -- Uruguay. Canada will become the first major economic power to allow the widespread legal use of cannabis for recreational purposes.

Canopy, Cronos, and Tilray have already carved out leading positions in Canada's medical marijuana market. All three companies have scrambled to boost their production capacity and secure supply agreements with provinces and territories to serve the recreational market. 

Product shortages throughout Canada are expected by many as the recreational marijuana market opens. This would mean that the licensed cannabis producers will be able to sell all the product they can get their hands on. That's a good position to be in for Canopy, Cronos, Tilray, and their peers.

And while the other news from Canopy and Cronos wasn't as important of a factor in the stocks' gains today, the deals announced could be important over the long run. Canopy's agreement to buy ebbu is especially interesting.

Ebbu is a U.S.-based company. Canopy noted that the "transaction would not have been pursued were it not in clear accordance with current U.S. federal law." Because ebbu focuses on hemp research, it isn't breaking U.S. laws regarding marijuana. Canopy also stated that there wouldn't be any production or sale of products resulting from ebbu's research "unless and until it would be federally legal to do so."

The timing of when Canopy might be able to market hemp-based cannabidiol (CBD) products in the U.S. might not be as far off as many expect. Both the U.S. House of Representatives and the U.S. Senate have passed different bills that would allow hemp-based CBD products to be sold in states that allow such products without violating federal laws. So far, the differences between the two bills haven't been ironed out -- but there's a possibility that a final bill could be finalized and approved before the end of the year. 

Now what

As exciting as Canada's recreational marijuana market opening this week might be for many investors, the real question is how well Canopy Growth, Cronos Group, and Tilray will perform down the stretch. As my colleague Sean Williams recently pointed out, there was "a short period of euphoria" in Colorado, Oregon, and Washington after the states' recreational marijuana markets opened, but prices dropped afterward.

And while there could be product shortages initially in Canada, it's only a matter of time before supply exceeds demand. When that happens, the fortunes of Canopy, Cronos, and Tilray will hinge on markets outside of Canada.

Plenty of unknowns remain for the major Canadian marijuana growers. But there's at least one certainty: This is an enormously important week -- not just for Canopy, Cronos, and Tilray, but for the entire cannabis industry.

More From The Motley Fool

Keith Speights 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.