Canopy Growth Corp. (TSX:WEED) rose more than 10% at the opening bell on March 27 after the CBC reported the government plans to have a legal recreational market framework in place by Canada Day 2018.
The news was a relief for investors after a pullback saw the stock drop from $13 per share in February to below $10 in the previous week.
What’s the scoop?
According to the CBC, the Liberal government will announce new marijuana legislation in April that will include many of the recommendations put forward by the task force report the government received late last year.
Details are still scarce, but it appears Ottawa will be responsible for ensuring the country’s cannabis supplies are safe through control of the licensing of the suppliers.
The provinces, however, would be burdened with the task of overseeing the market roll-out, including decisions on distribution, sales, and pricing.
Positives for investors
The indication of a potential launch date is welcome news for investors who have been getting nervous in recent weeks as comments coming from key players suggested a prolonged process could be possible.
For example, Bill Blair, who is Toronto’s former police chief and the current parliamentary secretary to Canada’s justice minister, told Bloomberg earlier in March that he didn’t want to speculate on a time frame because he wasn’t sure how long it would take for the process to be sorted out in the 10 provinces and three territories.
Ongoing risks
Investors should probably check their enthusiasm.
Ottawa might be able to get its part sorted out by the summer next year, but that doesn’t mean the provinces will be ready.
There are a lot of moving parts to this process, and it is no easy task to get a market of this magnitude set up in so little time.
Think about it.
You are looking at a potential industry with an estimated worth of more than $5 billion per year being opened from scratch. Battles for distribution rights are sure to emerge, and the provincial governments will not rush the process given the political risks of the roll-out backfiring. That could be why Ottawa is dumping most of the difficult tasks on their shoulders.
Pricing alone could take significant time. Too much tax will drive consumers to the black market, yet not enough tax could put the provinces in the red.
Regulating distribution and sales is no easy task either, as heated debates should be expected over how and where the product can be sold.
Based on the backlash already being seen in some communities that have illegal dispensaries, getting the retail part wrong could be political suicide.
Another challenge, which is a risk for both the federal and provincial governments, is to get Canadian parents to see the opening of a recreational market as a positive measure to protect their kids, rather than an open endorsement of the use of marijuana.
That one might be tricky.
According to a CBC article, Health Minister Jane Philpott recently told reporters at an event in London, Ontario, that young Canadians are “using cannabis at high rates, the highest rates in the world.”
This could work in the government’s favour as it pushes the idea that legalization will keep children safe, but it’s tough to tell how it will all shake out.
Should you buy Canopy?
With a current valuation of more than $1.6 billion, Canopy appears priced for perfection, and that puts the shares at risk of a big pullback if things don’t roll out as investors expect.
The target date of July 1, 2018, is certainly positive news, but investors should be careful. There is a chance the provinces simply won’t be able to get things in place that quickly.
As such, I would avoid the stock today.
