The Motley Fool

Canopy Growth Corp.: Will Investors See Their Savings Go up in Smoke?

Canopy Growth Corp. (TSX:CGC) is one of Canada’s hottest stocks.

What’s going on?

The diversified cannabis company is a licensed producer and seller of legal medical marijuana, and has its sights set on dominating the recreational market.

It’s this non-medical opportunity that has driven investors into abnormal behavior; they’re gobbling up the shares and pushing the valuation to nosebleed levels.

In fact, Canopy Growth is up more than 100% since its debut on the Toronto Stock Exchange in late July and, at the current price of $7 per share, now boasts a market cap of more than $800 million.

Growth stocks can go on wild rides. We have seen it over and over again in the tech space, and the Y2K bubble was about as crazy as it gets.

Many of Canopy’s shareholders probably didn’t have trading accounts back then, but they should ask their parents what happened when the market finally realized the king wasn’t wearing any clothes.

What about the cannabis craze?

By any metric, Canopy looks overvalued, but when you consider the fact the recreational market still isn’t legal in Canada, you have to wonder what investors are smoking when they buy this stock at the current level.


Last April the government said it would have new legislation ready for the spring of 2017. A task force was set up in the summer and the nine-member panel is supposed to report back to the government in November, providing recommendations on how to go about the process.

Getting something concrete in place by next spring seems a bit ambitious, given the complexities tied to the issue.

Just think about it for a minute.

Who will be able to sell the product? Where will it be sold? Who will be allowed to buy it and in what quantities? Where will people be allowed to smoke? Will the rules be the same across the country or will each province or community have the right to implement their own local regulations?

And what about product offerings? Are cannabis cookies, cakes, and candies about to hit store shelves at the local pharmacy or corner store?

Then there is the issue of the existing laws.

Will production and possession for non-medical personal use be decriminalized? Will Canadians be allowed to set up their own grow-ops? Will people previously charged with pot-related offences have their criminal records cleared?

Who will be in charge of monitoring product quality? How do you police unlicensed producers? Who is going to pay those costs?

And don’t forget the taxes.

How much tax will be placed on the product? Who gets a piece of that pie?

If you tax it too much, the black market will thrive. If it isn’t taxed enough, the costs of administering the whole program will outweigh the revenue, and that defeats the whole purpose of going down this road, from a government’s point of view.

These questions are just the tip of the iceberg, so I suspect the details won’t be ironed out as soon as investors think. And if the numbers don’t shake out as expected, the whole thing could go up in smoke.

Should you buy Canopy Growth?

Canopy Growth could easily move higher on investors’ appetite to get into a hot sector, but the stock is trading at an unsustainable valuation today, and any negative news on the legalization process would hit the shares hard.

At this point in the game, I would look for other investment opportunities.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Andrew Walker has no position in any stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.