Canopy Growth Corp. (TSX:WEED) investors who’d bought the stock below $7 in early June have watched the share price jump more than 10% in the past two weeks.
Let’s take a look at Canada’s leading medical marijuana company to see if it deserves to be in your portfolio today.
Recreational market
Canopy and its peers have enjoyed star status on the Canadian markets over the past year as investors piled in to the marijuana sector, hoping to score big gains once the Canadian government launches a recreational market for the sale of cannabis products.
In recent months, the Federal Government outlined its plan to put the market in place by early July 2018.
That was great news for marijuana companies and their investors, but the buzz is starting to wear off as people sit back and ponder the scale of the project.
What’s the issue?
Ottawa is dumping the bulk of the responsibility on the provinces and territories to get the market set up. The regional governments are responsible for pricing, taxes, and setting up the rules for who can sell the products, where they can sell them, and how.
Estimates put the size of the Canadian recreational market at $5 billion or higher, so there is keen interest among the provinces to make sure they get things right.
For example, taxes have to be high enough to make the process a profitable affair. It isn’t going to be cheap to get the system set up, and monitoring it properly could prove to be challenging and very expensive.
At the same time, setting prices that are too high could drive buyers to the black market, which would undermine Ottawa’s official reason for legalizing the recreational pot market in the first place.
Beyond that, MPPs are going to want to make sure their constituents don’t get upset. There are already situations in several cities across the country where local residents are up in arms because dispensaries are popping up in their communities.
Pharmacies are vying for the right to sell the product. That might sound reasonable, but seniors aren’t going to be too happy either if they get stuck in a long line every time they go to get their regular prescriptions filled.
As you can see, there are a lot of moving parts to the story, and politicians are going to want to make sure they are not the ones to blame if the roll-out goes sideways.
For the moment, it looks like the pullback in Canopy’s stock is taking a breather, but any bad news coming out of the provinces could send the share price tumbling again.
Should you buy Canopy?
At the time of writing, Canopy’s stock price is $8.20 per share, which is definitely more attractive than the $12 investors paid back in February.
The company is doing all the right things to establish itself as the dominant player in the growing medical marijuana market in Canada and overseas and should be well positioned to capture a significant piece of the recreational market once it is launched.
If you think the provinces can get their act together and roll out the recreational market efficiently and on time, it might be worthwhile to start a small position in the stock.
If you suspect the provinces and territories are going to kick the can down the road, it might be best to stay on the sidelines.
Canopy is still very expensive based on its current revenue base, so you have to believe the market will evolve as planned to own the stock today.
