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Canopy Growth Corp.: Is the Pullback a Signal to Buy?

Canopy Growth Corp. (TSX:WEED) is down more than 15% in the past month, and investors are wondering if this is the right time to buy the stock.

Let’s take a look at the current situation to see if Canopy should be in your portfolio.

Medical marijuana leader

Canopy is the top player in Canada’s growing medical marijuana market, and management is making all the right moves to ensure the firm maintains its leadership position.

In recent months, Canopy closed a number of key acquisitions, including the purchase of Mettrum Health Corp., which brought in two national brands and significant additional production space.

With the addition of Mettrum’s client base, Canopy now serves nearly half the registered medical marijuana patients in Canada.

Canopy knows it has to scale up quickly, so it has entered an agreement with the Goldman Group, a prominent real estate developer. Under the arrangement, Goldman will buy or build facilities and outfit them to meet Canopy’s production requirements. Canopy will then lease the sites from Goldman.

Canopy is also buying properties. The company acquired the site that is home to its head office, adding an additional 472,000 square feet of space that could be used to triple its production and processing capacity.

Global aspirations

Canopy has a partnership in Brazil and owns a pharmaceutical distributor in Germany. The company also recently signed a memorandum of understanding with Namaste Technologies, which sells cannabis accessories through e-commerce sites serving more than 20 countries.

So, Canopy is on a roll and appears to be making all the right moves to cement its dominant position in a growing market.

Risks

Investors like the medical marijuana success, but most holders of the stock are looking ahead to the creation of a legal recreational market in Canada.

The government received its task force report at the end of November and plans to table legislation in the spring or summer. Investors are hoping the market will be open in 2018.

As a result, Canopy’s stock trades at an extremely high valuation, and that’s where the risk lies.

Ottawa might deliver on its plan, but indications in recent weeks suggest the government could take longer than expected to roll out the legal pot market. The prime minister himself has said Canadians should be patient.

Earlier this month, Bill Blair, who is Toronto’s former police chief and the current parliamentary secretary to Canada’s justice minister, told Bloomberg, he is “reluctant to suggest a specific time frame, frankly, because I don’t know how long this will take in each of our 10 provinces and three territories.”

That’s the thing investors have to watch.

Issues such as taxes and regulation have to be ironed out across the country, and the process could drag on for an extended period of time. To put things in perspective, tiny Uruguay took about five years to get its legal marijuana market plan sorted out.

Should you buy?

At the time of writing, Canopy has a market capitalization of about $1.6 billion. That’s a lot for a business that generated less than $10 million in revenue in its latest quarter.

Canopy is a great business, but the shares appear to be priced for perfection. If the roll-out of the recreational market gets delayed, this stock could get hit hard.

As such, I would look for other opportunities today.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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