Unless you’ve been living under a rock and haven’t heard, marijuana for recreational use becomes legal in Canada next week.
That impending change has been broadcast widely for the past few years, as the federal government and then the provinces scrambled to get legislation and a framework in place to be ready for the upcoming date. One company that is mentioned more often than others is Canopy Growth Corp. (TSX:WEED)(NYSE:CGC).
Amazingly, the Smith Falls-based company, which in the most recent quarter posted just $25.9 million in revenue and came out of the quarter with a net loss of $90.978 million is perceived by many to be one of the biggest investment opportunities in decades.
Throughout the past few months, we’ve witnessed an increasing flurry of updates from companies vying for a piece of this new lucrative market. We’ve watched as Canopy has acquired international distributors that allow it to access to foreign markets and forge supply deals with several provinces and prominent pharmacies. and we’ve even witnessed prominent beverage companies on both sides of the border partner with Canadian cannabis companies in the hope of developing lines of cannabis-infused beverages to be sold once legal.
In the case of Canopy, the beverage agreement with Constellation Brands resulted in the company taking a 9.9% interest in Canopy, which was increased to 38% through an additional $5 billion investment made this summer.
All of these events are linking together a much larger picture of an emerging industry that could reach into everything from beverages and edibles to incense, clothing and well into retail.
The real question is should you buy Canopy right now?
Nobody wants to act out of FOMO (Fear Of Missing Out), but in many ways, we can’t help ourselves.
The impending legalization and the opportunity posed by Canopy has been compared on more than one occasion to be like “investing in liquor companies at the end of prohibition.” That’s a powerful, if not an emotional statement to make, and there’s little reason to doubt that there will be some more growth to come, but it will be subject to a few constraints that prospective investors need to ponder.
First, Canopy has already shot well into the stratosphere in the past two-year period, with the stock appreciating 1000%. To say that the stock is not oversold yet would be folly, as would it be to dismiss the certain emotional aspect at play. In other words, the stock poses an opportunity over the long-term, but is still very volatile over the short term.
Second, speaking of the short term, how many storefronts will be ready to begin legally selling cannabis-products next week? The answer may surprise you. In the case of edibles and those beverages I mentioned earlier, the answer would be zero.
In the case of those beverages, we are likely a few years out, if at all before the child of the Canopy and Constellation venture comes to fruition. Keep in mind that the environment for legalization is a completely different story in the U.S. market at the moment.
There’s also Canopy’s financial results, which had it been any other segment of the economy would have analysts screaming for downgrades. Now, to be fair, Canopy is clearly in startup mode, spending on upgrading production facilities, setting up storefronts and seeking out new growth opportunities. \
This most recently came in the form of transferring cannabis to a research partner in the U.S., which occurred this week and represented the first legal export of cannabis products from Canada into the U.S., and could lead to more in the future.
In short, Canopy is a great long-term opportunity for growth-minded (pun-intended) investors, but the key point there is long-term. The stock is still very volatile and we’re embarking on a new market segment, so some profit-taking and a retreat from the current stock price highs could happen over the next few weeks.
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Fool contributor Demetris Afxentiou has no position in any of the stocks mentioned.