The Motley Fool

Canopy Growth Corp.: What Happens if Canada Gets Cold Feet?

Canada’s federal government is considering a plan to legalize the sale of recreational marijuana.

At the moment, only medical use of the drug is permitted, and Canopy Growth Corp. (TSX:CGC) is the market leader in the space.

The medical marijuana segment has limited growth opportunities, especially where the product is subsidized by the government or healthcare systems. We saw this recently with a decision by Veteran Affairs to reduce medical marijuana reimbursements.

As such, the pot of gold for investors is the estimated $10 billion Canadian recreational market.

The federal government set up a task force this summer to investigate how Canada might go about legalizing recreational marijuana sales with an initial report due at the end of November.

According to plans outlined earlier this year, the government is hoping to have legislation ready for the spring of 2017.

If the stars align the way Canopy investors hope, Canadians will be able to purchase marijuana in a legal market sometime in early 2018.

Things might very well roll along as planned, and that would certainly work out for Canopy and its investors.

However, buying the stock at today’s nosebleed levels appears very risky given the fact that any speed bump in the legalization process is sure to knock the snot out of Canopy’s stock price.

What could go wrong?

The Liberals have to be careful with this issue.

Ottawa, of all places, is currently a battleground between angry residents and illegal pot dispensaries.

Public opposition to the pop-up shops in local communities recently forced the police, who really don’t want to deal with the situation, to raid and shut down several stores.

These aren’t little cannabis stands on the side of the road; they are actual retail outlets set up in commercial buildings. The legality of the businesses is not the issue that is upsetting residents; they simply don’t want marijuana shops in their communities.

If local groups across the country feel the same way, this issue could quickly become a hot potato for Liberal MPs, and it’s unlikely the government is willing to risk its hold on power to appease pot smokers.

Opioid crisis

The government currently has another drug issue to contend with, and this one might kill the whole cannabis legalization process.

What’s going on?

Federal health minister Jane Philpott is under attack from several provinces for not responding adequately to the current fentanyl crisis that is killing Canadians across the country.

While there is a huge difference between the opioid epidemic and cannabis use, the lines could easily get blurred in the eyes of the general public.

It wouldn’t be a stretch to see voters start asking themselves why the government is pushing the legalization of one drug at a time when the country is at its wits end trying to stop the spread of another.

Should you buy Canopy?

Canopy now has a market capitalization north of $1 billion, which is a lofty valuation for a company with just $8.5 million in quarterly revenue and no profits.

Given the potential for pushback on the legalization process, I would look elsewhere for 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.