Canopy Growth Corp. (TSX:CGC) has been one of Canada’s most popular stocks in 2016.
Let’s take a look at the cannabis producer to see if it should be in your portfolio as we head into 2017.
All the right moves
Canopy has to be commended for its efforts to cement its leadership position in a rapidly growing industry.
The company is Canada’s leading provider of medical marijuana and continues to make acquisitions and develop strategic partnerships to ensure it continues to dominate the sector as well as position itself for strong international growth.
Recent deals include an agreement to buy Canadian competitor Mettrum Health Corp., a real estate partnership with the Goldman Group, and the acquisition of a German pharmaceutical distributor.
The Mettrum and Goldman deals are of particular interest.
Mettrum brings two national brands to the medical marijuana portfolio and will significantly increase Canopy’s production platform. When the deal closes, the new company will control nearly half of the current Canadian medical marijuana market.
The agreement with the Goldman Group will see Goldman acquire or construct new properties across Canada with the aim of building the production facilities to Canopy’s proprietary specifications and leasing the sites back to Canopy.
The move will help Canopy accelerate the expansion of its production capabilities.
Management has also done a good job of tapping the equity markets at opportune times to raise funds. The latest round saw the company raise $60 million in a bought deal offering at $10.60 per share. The stock currently trades at $9 per share.
Recreational market
Most of the hype around the stock is connected to investor enthusiasm about the potential opportunities that lie in a legal recreational market in Canada.
Fans of the stock are betting the Liberal government will deliver on its plans to open the market in 2018. Critics say that’s wishful thinking.
What’s the status?
The government received a preliminary task force report at the end of November and has said it would table legislation in the spring. If Ottawa manages to meet the timeline and actually gets the market up and running by early 2018, Canopy might grow into its lofty valuation in a reasonably short period of time, but there is a risk the legalization process could hit some roadblocks, and any sign of delays would likely hit Canopy’s stock hard.
What could go wrong?
Ottawa has a number of tricky items to sort out, and it really has to get this right. The last thing the prime minister wants to see is an election loss four years from now because his government bungled the recreational pot roll-out.
The tax issue is the most important, given the fact that there really isn’t much sense in going through the whole circus if the recreational marijuana market isn’t going to fill the federal coffers. The provinces will want their fair share too, since they will likely be the ones responsible for regulating the market.
Too much tax will drive buyers to black-market sellers. Too little tax could make the market cash-flow negative for the government. It will be interesting to see where the final decision lands on this one.
Sorting out the who, what, where, when, and how questions might also require more time than expected. Communities are already pushing back against some of the illegal dispensaries that have been set up in local retail locations. If MPs start to sense the “not in my back yard” sentiment is shared across the country, the whole legalization process might come to a screeching halt very quickly.
Investors appear unfazed by the challenges, despite comments from suppliers that suggest 2018 is a tad optimistic, especially given the size of the country. Tiny Uruguay, for example, took five years to work through the process before it finally gave the recreational marijuana market the green light.
Should you buy?
Canopy is positioned well to benefit from a growing medical and potential recreational marijuana market, but investors still have their heads in the clouds regarding the value of the company.
At the current price, Canopy has a market capitalization of $1.1 billion. That’s pretty steep for a business that generated less than $10 million in revenue in the third quarter.
As such, I would look elsewhere for opportunities heading into 2017.
