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Canopy Growth Corp.: Is the Task Force Report a Signal to Buy?

Photo: Plantlady223. Licence: https://creativecommons.org/licenses/by-sa/4.0/ Source: https://commons.wikimedia.org/wiki/File:Young_cannabis_plant_in_the_vegetative_stage_01.jpg

The Federal Task Force on Marijuana Legalization and Regulation has released its report, and investors are wondering if the 80 recommendations are good news for Canopy Growth Corp. (TSX:CGC).

Let’s take a look at some of the items that might have an impact on the potential for Canopy to grow into its lofty valuation.

Age to buy

The task force recommended the establishment of a legal retail market that would allow Canadians who are at least 18 years old to purchase legal marijuana. Rumours had circled that the suggested minimum age could come in as high as 25, so producers should be happy about the lower age threshold.

Where to buy

Medical marijuana is currently only sold through the mail, but the task force is recommending a mix of mail order and retail outlets for the roll-out of the recreational market.

Producers, who would theoretically get broader market exposure through the storefront channel, would perceive this as a positive, but there is a catch.

The task force is against selling legal pot in stores where alcohol and tobacco are sold. This would eliminate prime retail locations such as corner stores, gas stations, and beer and wine outlets where most people would be able to quickly and easily access the product.

No promotion

Advertising is also a point of contention. The producers are hoping to differentiate their product offerings through heavy branding and advertising campaigns. Their reason for this is to separate their product from the black market offerings.

The task force is of the opinion that there should be a ban on all advertising and branding efforts.

This would potentially hit large producers, such as Canopy, the hardest because they have the financial firepower to outspend smaller players.

The big risk

Buried in the report is one additional recommendation that could spell big trouble for Canopy and its peers.

The task force believes the government should allow Canadians to grow four plants at home for personal use. If Ottawa decides to implement this recommendation, there could be a drastic reduction in estimates for the potential size of the recreational market.

At the moment, pundits put the value of the Canadian market at $5-10 billion per year. If people are allowed to grow up to four plants for personal use, you have to assume they will grow more than the limit, and that could substantially reduce marijuana demand through the retail channels.

Think about it.

How could local, provincial, or federal authorities possibly ensure that all Canadians are strictly adhering to the rules? It just won’t happen.

Should you buy Canopy Growth?

Canopy remains the market leader in the medical marijuana space and is poised to benefit from the legalization of the recreational market.

At this point, however, there are still too many unknowns to justify the company’s $1.25 billion valuation. As such, I would avoid the stock.

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