Canopy Growth Upgraded on Hope: U.S. Marijuana Legalization by 2027?

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

By now you've heard the news: Canopy Growth (NYSE: CGC) has confirmed rumors that it intends to acquire U.S. vertically integrated cannabis company Acreage Holdings in a deal valued at $3.4 billion -- the largest acquisition in marijuana history. Based on this one single fact (and a corollary assumption), this morning analysts at GMP Securities upgraded Canopy Growth stock to buy and assigned a new price target of 72 Canadian dollars, or nearly $54 a share.

Here's what you need to know.

Image source: Getty Images.

What Canopy (might) buy

Let's start with the details of the deal to acquire Acreage, beginning with the fact that this is not a done deal just yet. As TheFly.com explained in a report last week, Canopy is working around NYSE and Toronto Stock Exchange restrictions on listing companies that engage in the currently federally illegal practice of selling marijuana in the U.S by buying the right to buy Acreage at a later date.

Specifically, Canopy wants to pay Acreage $300 million today for the right to acquire all of Acreage sometime in the future, in exchange for which Canopy will trade 0.5818 shares of Canopy for each share of Acreage on that later date, raising the total implied value of the acquisition to the aforementioned $3.4 billion.

What exact date that will be will depend on when the U.S. Congress changes its laws to legalize the sale of marijuana across the length and breadth of the United States.

Mark your calendars

When will that time come? Apparently, 2027 -- or sooner.

Upgrading Canopy this morning, GMP noted that "there is a high likelihood that federal legalization occurs within the 90-month expiry clause," as quoted in a write-up on StreetInsider.com (subscription required). (The analyst mentions this, by the way, because in Canopy's press release on the Acreage acquisition, it notes that "if the Triggering Event [i.e., legalization] is not satisfied or waived within 90 months from the payment of the Up-Front Cash Premium, the Agreement will terminate.") Thus, it seems Canopy's deal with Acreage is conditioned upon U.S. federal legalization happening within the next 7.5 years -- or basically, by the end of 2027.

And GMP may be right about legalization happening soon. As my fellow Fool.com contributor Keith Speights pointed out last week:

The prospects of U.S. marijuana legalization certainly appear to be better than ever. The STATES (Strengthening the Tenth Amendment Through Entrusting States) Act, which would federally recognize legalization of cannabis in states that have done so, has been introduced into the U.S. House of Representatives and the Senate. With Democrats controlling the House, passage of the legislation in the chamber seems likely. That could create tremendous pressure on the GOP to allow a vote to be held on the STATES Act in the Senate.

What it means to Canopy Growth investors

Acting on this belief, GMP Securities is going ahead and including Acreage in its updated valuation on Canopy Growth stock. (It's not yet including Acreage in its near-term profits projections, however, as there's no firm guarantee on when Canopy will be able to complete its acquisition and begin benefiting from Acreage's revenue and profits streams.)