Will Legal Developments in the U.S. Benefit Canopy Growth?
Since becoming listed at the New York Stock Exchange (NYSE) in May 2018, the Canada-based cannabis company Canopy Growth (NYSE:CGC) has seen its stock price reach new highs almost every few months.
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Following the record Christmas Eve decline in the broader markets, CGC stock has staged an impressive comeback and year-to-date it is up almost 69%.
Now that the earnings season is behind us, let’s look at what may be next for CGC stock, especially in light of the recent legal developments in the U.S.
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CGC Stock Is an Industry Leadership in Canada
As a diversified cannabis and hemp company with a market cap of almost $16 billion, Canopy Growth is one of the leaders in the industry in Canada.
It was the first federally regulated, licensed and publicly traded cannabis producer in Canada and started trading on the Toronto Stock Exchange (TSE) in Aug. 2016. In 2018, Canada legalized marijuana federally, a step that gave a big boost to CGC and its fellow competitors. Canada is the first G7 nation to legalize marijuana nationwide.
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In Aug. 2018, when the alcoholic beverages giant Constellation Brands (NYSE:STZ) announced a $4 billion investment into CGC, Wall Street took notice. STZ now holds a 38% stake in the company.
Since being listed at the NYSE, the number of funds that own the stock has also been going up. Some of the institutional owners include The Vanguard Group, Bank of Montreal (NYSE:BMO), and Morgan Stanley (NYSE:MS).
When CGC released Q4 earnings on Feb. 14, it beat revenue expectations and reported a 282% increase in quarterly revenue, mostly thanks to the growth in the recreational marijuana market in Canada.
One of the most important takeaways from the earnings report is that sales from the black-market in Canada are now shifting to legal online sales, i.e., to the retail sites of CGC and other major companies in the industry.
During the earnings call, investors also noted that the company has operations in 13 countries in five continents. The company’s investments in these overseas markets are likely to give it a head start globally, too. However the details about the worldwide operations are somewhat sketchy as they not yet contributing to revenues.
In other words, the legalized Marijuana Industry (MI) is still at its infancy in Canada and almost non-existent globally. Leaders like Canopy Growth are likely to become the first ones to be positively affected by major North American or global developments that may boost the sales and use of recreational or medicinal marijuana.
The U.S. Farm Bill of 2018
Click to Enlarge
In Dec. 2018, the U.S. Congress
passed the ‘Farm Bill,’ which President Trump later signed into
law. The Bill legalized hemp and hemp-derived
ingredient cannabidiol (CBD), especially popular among
consumers seeking relief from physical pain.
The general public does not know the difference between cannabis, marijuana and hemp very well. Therefore people often use these three terms interchangeably.
In short, “Cannabis Sativa†is the botanical name of the plant species. This plant has different strains, one of which is “Industrial Hemp†and the other which is “Marijuana.†Therefore hemp and marijuana are sometimes referred to as ‘cousins.’
Industrial Hemp naturally has high levels of CBD and low levels of tetrahydrocannabinol (THC). THC is behind the “high†from smoking marijuana; in other words, hemp does not have the psychoactive properties of marijuana. Hemp cannot contain more than 0.3% of this psychoactive ingredient THC.
Marijuana has high levels of THC and lower levels of CBD.
Because hemp is now an ordinary agricultural commodity in the U.S., farmers can apply for federal hemp cultivation permits. And in January, Canopy Growth announced that it has obtained a license to process and produce hemp products in New York State. It will establish a hemp industrial park in the state for extraction and product manufacturing. CGC’s operational investment will be between $100 million to $150 million.
Although it is too soon to predict how the legal hemp production in the U.S. will affect CGC’s bottom line, analysts believe that the partnership between Canopy Growth and Constellation Brands is the area to watch. The two are currently developing cannabis-infused beverages for Canada, where experts believe they will be legal by 2020.
Canopy Growth may for example decide to enter the U.S. CBD-infused drinks market with a wellness shake or drink. Some industry watchers are expecting big developments as well as numbers in this niche market, such as reaching $260 million in a few years in the U.S. alone.
Wall Street believes CGC and its peers will seize upon the market expansion opportunities that the legalized hemp provides. However, it will probably be several quarters before the investments would pay off and turn into profits.
Will the U.S. Legalize Marijuana at the Federal Level?
At the federal level, marijuana is still illegal in the United States and remains a Schedule I drug. However, at the state level, the legal status of marijuana depends on the laws of the individual state.
Legalization allows for both individual marijuana possession as well as the legal production and sale of the drug. Legalization can happen in two categories: the legalization of recreational marijuana or the legalization of medical cannabis.
As both the recreational and the medicinal use is becoming more widely accepted, the number of U.S. states that have legalized it has increased. Medical cannabis is now legal in 33 states. Recreational marijuana is legal in 10 states, i.e., individuals require no prescription to use marijuana in these jurisdictions.
However, none of the Canadian cannabis stocks have so far done any business in these pot-friendly U.S. states, as the listing requirements at the NYSE as well as at the TSE bar companies from engaging in commercial activities in countries where they would be breaking the law.
Therefore, it would not be wrong to assume that if and when the U.S. federal legalization of marijuana occurs, it may create a rush by Canadian firms that have been previously unable to enter the U.S. market.
For example, U.S. marijuana sales could easily reach $75 billion by 2030 And investors are hoping that Canopy Growth would have a first-mover advantage in such a scenario.
The Bottom Line for CGC Stock
In 2018, the marijuana industry gained validation in Canada. However there is a lot of confusing hype surrounding the U.S. market potential for industry leaders like Canopy Growth. Long-term investors may want to wait for CGC’s next earnings report to be released in May before they hit the ‘buy’ button.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
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