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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.

Why?

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.

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

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