The Motley Fool

Canopy Growth Corp.: Is the Chaos Set to Continue?

Canopy Growth Corp. (TSX:CGC) is on one wild ride.

The company hit a valuation of $1 billion on November 11 and briefly topped $2 billion just three sessions later in a day that saw the stock trade in a range between $10 and $17 per share before finishing down 15% at $11.40.

Canopy was the most actively traded stock on the TSX that day with more than 24 million shares moving back and forth before the final bell. That’s just nuts.

How crazy was it?

The action was so out of control that Canopy tripped circuit breakers four times, forcing the stock to be halted for a total of 20 minutes through the session.

What’s the big deal?

Canopy is the market leader in the budding Canadian cannabis market which pundits suggest could be worth as much as $10 billion per year once recreational marijuana sales get the green light from the federal government.

For the moment, the market is restricted to sales for medical use, and Canopy is the leader in the space.

The government set up a task force in the summer with the idea of having a legalization framework ready by the end of November 2016 that would be used as a starting point to hammer out legislation by the spring of 2017.

If all goes as planned, the Canadian recreational pot market could be open in early 2018.

Investors are not waiting for the process to be completed before rushing into the sector, and the euphoria appeared to hit its peak on November 16.

The fact that four U.S. states just voted to make recreational marijuana legal also helped stoke the fire.

Rampant speculation

Investors who got in early are looking at some serious paper gains. The smart ones have cashed out and put the money somewhere safe.

Why?

Canopy’s latest quarterly report says the business generated just $8.5 million in revenue for the three months ended September 30. The stock’s surge above a $1 billion valuation was already insane, let alone the move to $2 billion that ensued after the numbers came out.

I understand that growth stocks tend to have lofty valuations, but Canopy is way ahead of itself, and the sharp reversal we saw on November 16 proves it.

Looking ahead

The long-term prospects for this industry are certainly appealing, especially if Canada hits its target of opening the recreational market in 2018, but there are some huge risks.

If the legalization process here in Canada hits a few speed bumps, which I expect it will, marijuana stocks will drop significantly.

South of the border, few people expect the U.S. to follow suit and legalize cannabis at the federal level.

This means there is always a risk the Department of Justice (DOJ) could decide to crack down on states that are allowing the sale of the product. If that happens, investors in Canadian companies hoping to cash in on the American opportunity could be severely disappointed.

Under the Obama administration, the attorney general has taken a hands-off approach. The DOJ under the Trump administration might not be as pot friendly.

Should you buy Canopy?

At this point, the stock is too volatile to be considered reasonable for investing. I would let the traders have their fun and look for other opportunities.

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 Andrew Walker has no position in any stocks mentioned.

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