Canopy Growth Corp. (TSX:WEED) has captured the imagination of retail investors across Canada.
The company is one of the most popular stocks on the TSX, and despite some serious volatility in recent months, it continues to attract investors hoping to cash in on the growing marijuana segment.
Let’s take a look at the current situation to see if the stock should be in your portfolio.
Positive developments
Canopy is making all the right moves to ensure it retains its leadership position in the Canadian medical marijuana market.
The company recently closed its acquisition of competitor Mettrum Health Corp. in a move that adds two national brands to the portfolio and expands production capabilities. It also increases Canopy’s customer base to the point where it provides product to about half the registered patients in the Canadian medical marijuana market.
Ramping up production capacity is important in this fast-paced segment, so Canopy has entered an agreement with a real estate company, the Goldman Group, to help it grow.
Goldman will buy or build facilities and outfit them to meet Canopy’s production requirements. Canopy will then lease the locations from Goldman.
The latest strategic move is a memorandum of understanding (MOU) with Namaste Technologies, which is a provider of cannabis accessories through its e-commerce retail stores.
Canopy also has a partnership in Brazil and owns a pharmaceutical distributor in Germany.
Overall, things are rolling along quite well.
Canopy just released results for the quarter ended December 31, 2016. Revenue came in at $9.75 million — up 15% from the previous quarter and 180% higher than the same period in 2015.
Risks
At the time of writing, Canopy has a market capitalization of more than $2 billion. That’s a lot for a business with quarterly revenue of less than $10 million.
Investors are betting that Ottawa will follow through on plans to legalize the recreational cannabis market in the near future.
The government received an initial report from its task force at the end of November and is expected to table legislation in the coming months. If all goes according to the hopes of Canopy’s investors, legal marijuana might be available in 2018.
As the industry leader, Canopy stands to capture a fair chunk of that market, which is estimated at $5 billion per year or better.
So, it’s easy to see why investors are so hungry for the stock, but there are big downside risks if Ottawa’s plans hit a speed bump.
A number of technical issues could hold up the process, including the decision on how to tax the product. Too much tax could simply drive consumers to the black market; not enough tax will make the proposition a losing venture for Ottawa and the provinces.
Another potential situation to watch is pushback from voters. Canadians might be open minded about allowing people to smoke pot in a legal framework, but that doesn’t mean they want dispensaries set up in their neighbourhoods.
If MPs start to get an earful from angry residents, and there are already indications of conflicts in areas where illegal dispensaries are currently in operation, the entire rollout could come to a screaming halt.
If that happens, Canopy’s investors could be in for a shock.
Should you buy?
The company is doing everything right at this point in the game, but the valuation is so high that investors are at serious risk if bad news come out of Ottawa.
As such, I would stay on the sidelines until there is more clarity on the legalization of the recreational market.
