Canopy Growth Corp. (TSX:CGC) has gone from being a long-shot penny stock to a billion-dollar darling in the past 12 months.
Let’s take a look at Canada’s cannabis king to see where things could go next year.
Canopy is Canada’s largest supplier of medical marijuana. This area of the pot market remains the company’s core focus both in Canada and abroad.
In early November, Canopy revealed a major expansion strategy through a partnership with real estate specialist, the Goldman Group. The agreement will see Goldman acquire properties and build new facilities to Canopy’s specifications and then lease the sites back to the cannabis producer.
Canopy is also growing through acquisitions. The company recently announced an agreement to buy competitor Mettrum Health for $430 million in stock. A successful completion of the deal will create a dominant player in the medical marijuana space with 665,000 square feet of production facilities and give Canopy control of roughly 50% of the market.
Overseas, Canopy has acquired a German distributor and is making headway with its operations in Brazil.
In a quickly developing domestic and global market, it appears Canopy is making the moves necessary to ensure its position as a dominant medical marijuana player.
Canopy has used the high-flying stock price to raise significant cash in recent months. The latest deal is for $60 million in a bought-deal agreement to issue nearly 5.7 million new shares at $10.60 per share.
As long as investor appetite for the stock remains high next year, Canopy will continue to enjoy access to easy cash.
All eyes on Ottawa
Canopy currently sports a market capitalization of $1.25 billion. That’s an outrageous valuation for a business that generated just $8.5 million in third-quarter revenue.
What’s the attraction?
Investors are betting on Ottawa’s plans to legalize the sale of recreational marijuana, which some pundits believe is a market worth $6-10 billion per year.
The government just received its final report from a task force set up this summer to study how the sale of recreational marijuana could be rolled out across the country. Using the report as a starting point, the government hopes to have legislation ready by next spring, and investors in Canopy are betting on the market opening in 2018.
If that timeline holds true, the optimism might be warranted, and Canopy could potentially grow into its lofty valuation. This would set the stock up for a strong 2017.
There is a real possibility that legalizing the sale of marijuana on a national level could turn out to be more problematic than expected, and things might not move as quickly as planned.
Provinces and municipalities are going to want to share the tax revenue, because they know they will be responsible for managing the headaches that come with the program. That could set up a nasty battle in the coming months.
At the voter level, the city of Ottawa is already seeing strong pushback from residents who don’t want marijuana dispensaries setting up shop in their neighbourhoods. The Liberals don’t want this to backfire and result in a loss in the next election, so the roll-out could get dragged along for the next five years.
That’s how long it took tiny Uruguay to get through its legalization process.
As such, I would be careful chasing the stock at the current price. Any indication in 2017 that Ottawa is going to take more time than expected could result in a serious pullback in the cannabis sector.
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Fool contributor Andrew Walker has no position in any stocks mentioned.