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Many cannabis investors are showing signs of bullishness again now that the U.S. government announced it moved forward with efforts to reschedule marijuana into a less serious drug regulatory category. The recategorization doesn't mean that marijuana legalization in the U.S. is inevitable, but it's a clear sign of a change in regulatory attitude on the substance that suggests legalization is a more of a possibility.

Three Canadian-based cannabis stocks that could benefit the most from legalization in the U.S. market are Canopy Growth (NASDAQ: CGC), Tilray Brands (NASDAQ: TLRY), and SNDL (NASDAQ: SNDL). Here's a breakdown of their respective businesses and which one may be the best option for investors who are bullish on the prospects for legalization.

1. Canopy Growth

Ontario-based Canopy Growth has been making moves in anticipation of legalization in the U.S. for years, dating back to 2019 when it first announced plans to acquire multi-state operator Acreage Holdings. While legalization still hasn't taken place, it hasn't stopped Canopy from trying to find ways to close on its acquisition of Acreage and other U.S.-based cannabis businesses.

Recently, the company obtained the blessing from its shareholders to move ahead with Canopy USA, a special purpose vehicle it has created as the financial home for its U.S.-based assets, including Acreage. While it will technically be separate from its core business, it gives Canopy Growth a way to take advantage of potential synergies between the businesses before U.S. legalization takes place.

Canopy Growth is a business that looks to be all-in on being a large player in the U.S. pot market one day. But in the meantime, its operations still aren't in great shape, with the business incurring a net loss totaling 675.8 million Canadian dollars for the year ending March 31, 2024. While that loss is an improvement from a year ago when impairment and restructuring charges resulted in its net loss ballooning to more than CA$3.3 billion, the company has a long way to go in proving that it can run a sustainable operation.

2. Tilray Brands

In Tilray Brands' case, the company has opted for a more diversified strategy. While waiting for legalization in the U.S., it branched out into other ways to expand its business, such as alcohol brewing and distribution. Last year, it announced that it was acquiring eight brands from beer maker Anheuser-Busch InBev, which would make Tilray a top-five craft beer brewer in the U.S.

While beer isn't cannabis, moves like this do accomplish a couple of goals. First, by acquiring U.S. assets, Tilray can leverage them in the future, potentially using those plants and resources to help produce cannabis products down the road. Second, it puts Tilray in a good position to take advantage of the cannabis beverage market, which is a potentially underrated growth opportunity. According to ResearchAndMarkets, globally, the cannabis beverages market could be worth $3.8 billion by the end of the decade, which would be more than three times what it was worth in 2023 ($1.2 billion).

Tilray is arguably a safer investment option than Canopy Growth due to its diversification. While it also struggles with profitability, it at least consistently reports positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Last quarter, for the period ending Feb. 29, Tilray's adjusted EBITDA was $10.2 million. It expects the total for the current fiscal year, which ended on May 31, to be at least $60 million. That's in stark contrast to Canopy Growth, which still posts losses, even on an adjusted EBITDA basis.

3. SNDL

A potentially underrated play for cannabis investors is SNDL. It has created a U.S.-focused entity in SunStream USA, which, like Canopy USA, is going to hold U.S.-based cannabis assets for the business. And based on first-quarter revenue for 2024, acquiring those assets could potentially make SNDL a top five multi-state operator in the U.S. A lot could change by then, but it gives investors insight into just how significant and promising those assets, which include Parallel and Skymint, could be.

Like Tilray, SNDL has been diversifying into alcohol as well, but its focus has been on the Canadian market rather than expansion into the U.S. The liquor retail segment is now the largest portion of its operations, accounting for 59% of the company's net revenue for the first three months of the year. That diversification has undoubtedly helped put the business in much better shape today.

Last quarter, SNDL's net loss totaled CA$4.7 million, which was an improvement from a loss of CA$36.1 million a year ago. The company hopes to generate positive free cash flow in 2024.

Which stock is the best option if you're bullish on legalization?

If cannabis legalization in the U.S. were to happen within the next year, Canopy Growth stock may be the clear winner simply because of how big it has been betting on legalization over the years.

But, realistically, legalization, should it happen, could take several years. Between the time it takes for a bill to eventually pass and become law, and for all the details to be ironed out, it wouldn't be a surprise if it takes until the end of the decade for it to be a realistic scenario. In that situation, Canopy Growth's mounting losses could put it in a serious predicament, as the business' operations are far from sustainable right now.

Both Tilray Brands and SNDL, with their more diversified strategies, could make better options in that case. I'd give an edge to SNDL due to its strong exposure to the alcohol industry and prospects for positive free cash flow in the near future.

All these stocks, however, come with risks, and investors who buy shares of any of these businesses should expect a lot of volatility.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends SNDL and Tilray Brands. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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