Should Investors Consider Canopy Growth Corp.?

Canopy Growth Corp. (TSX:WEED) is certainly a hot stock, but there’s a long way to go before this company starts generating serious money.

| More on:

Investors are incredibly excited about Canopy Growth Corp. (TSX:WEED) and for good reason. A year ago, the stock was trading under $3 a share. It’s now trading at close to $12, returning four times more in 365 days. So, for those who’d bought in early on, the returns are quite impressive.

But we’re now looking at a situation where the stock has increased quite aggressively thanks mostly to the belief that the future is bright. And there are still many investors sitting on the sidelines wondering if they should consider this company.

I’m not so sure…

Buying Canopy is all about buying the belief that the government of Canada (and the world) will start passing laws that make marijuana legal. While the focus is currently on medical marijuana, the long-term hope is that recreational marijuana usage will also be approved. And that makes sense because an analysis by Cowen & Co, an alternative investment management firm, found that legal marijuana could be a US$50-billion-a-year business by 2026 in the United States alone.

But even if we take a step back and look just at Canada, the government is saying all the right things. Prime Minister Justin Trudeau and the Liberals are looking to push legislation through with the expectation that it’ll go live this year.

But if we look at California, which has already legalized marijuana, it’s clear that it’s going to take a lot longer to get regulation through to manage marijuana. There are still a lot of questions to answer; for example, how is it taxed? How will that money be raised? What’s the legal smoking age? Who can sell it? Who can produce it?

Should anything bad happen, either with the government stepping on the brakes regarding legalization, or if it just takes a lot longer for the industry to get going, that could have a seriously negative impact on the stock price. And with Canopy having less than $10 million in quarterly sales and no profits, being worth $1.8 billion is a very dangerous place to be.

Nevertheless, Canopy is in a strong position to shine when legalization actually takes place.

First, Canopy is finalizing the acquisition of Mettrum Health Corp., which gives the company about half of the Canadian medical marijuana market. This will help the company increase its sales. Further, the acquisition will expand Canopy’s production facilities and add new brands. As we see with major tobacco companies, multiple brands all lead to one bank account.

Second, Canopy has signed a deal with Goldman Group, a real estate developer, to set up new production facilities for Canopy. In return, Canopy will lease these facilities from Goldman. This reduces costs for Canopy while also allowing it to scale aggressively should the government prove me wrong and legalization goes down without a problem.

For those who have been owners during this incredible run-up, you may want to take some profits off the table because I believe that this will dip back down if there are any hiccups in legislation. As for those who want to buy, I remain unconvinced that this is the right price. I believe the world is moving toward complete legalization. And when that happens, a $1.8 billion market cap is not what Canopy will have. So, it’s all about your time perspective.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jacob Donnelly has no position in any stocks mentioned.

More on Investing

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »