Canopy Growth Worth a Nibble if the U.S. Cooperates

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Canopy Growth (NYSE:CGC) and some of its marijuana equity peers are in the midst of a mini-resurgence. CGC stock is higher by almost 33% in the current quarter. As impressive as that move is, Canopy would need to roughly quadruple to get back to its 2018 high.

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Over the near-term, asking Canopy or any of the other beaten-up-but-rebounding Canadian cannabis names to return to the 2018 highs is asking a lot. But, the company is getting its act together and price action in CGC stock is reflecting as much.

A long-held knock on Canopy is that the producer frequently grows more cannabis than it can sell. This is prompting some analysts to remain leery of operational improvements being credible catalysts for the stock.

However, there are reasons to believe Canopy is, finally, prioritizing efficiency. The company recently closed some production sites, trimmed headcount and announced plans to hone its geographic emphasis.

To the latter point, Canopy is emphasizing its home market of Canada, Germany and the U.S.

Briefly summarizing the first two markets, Germany is Europe’s most advanced legal cannabis market. In Canada, the marijuana market is liberalizing. This includes an open-store licensing policy that could boost sales in the key recreational user demographic.

Looking South of the Border

When the marijuana equity collapse started in earnest last year, a frequent refrain among analysts and investors was that Canadian growers didn’t have enough exposure to the faster-growing U.S. market. That troublesome scenario boils down to marijuana being illegal at the federal level. That means it’s practically impossible to export it into this country.

However, things are looking up in the U.S. for cannabis growers.

In the wake of Covid-19, states are struggling to fill budget gaps. Thus, lawmakers are entertaining legalization of some vices, primarily online and sports betting and cannabis, as revenue-generating avenues. Sports gambling is an easier road to traverse because it’s federally permissible, but that’s not keeping plenty of states from mulling cannabis legalization.

Entering 2020, some analysts estimated as many as 16 states could put cannabis initiatives on the November ballot, but those efforts suffered setbacks because of the novel coronavirus pandemic. There are 27 states where budget gaps will surpass 10% this year and a third are considering marijuana legislation or ballot proposals in 2020.

The U.S. Market and CGC Stock

Like plenty of other companies in scores of industries, Canopy has its share of missteps. Waiting for the U.S. market to liberalize isn’t one of them.

Last year, Canopy struck a deal with Acreage Holdings (OTC:ACRG), a U.S.-based multi-state operator, to acquire that company with the caveat being the agreement will be consummated when marijuana becomes legal in the U.S.

That could happen sooner than some expect.

In the essence of avoiding overt political chatter, polls and prediction markets are pricing in lengthening odds of President Donald Trump being reelected and shortening odds of a blue wave in Congress.

Although some Republicans are warm to the idea of cannabis legalization, Democrats controlling both houses of Congress and the White House would speed the process along. This would potentially benefit CGC stock along the way.

Bottom Line on CGC Stock

Canopy is relevant again and that’s a solid starting point. Yes, there is some operational risk lingering, meaning the company needs to prove it can execute on grower-smart initiatives and that its three-market focus will pay off.

However, even with CGC stock up almost 33% in less than three months, investors considering the name today are paying for a Canada liberalization and corporate execution story with a call option on U.S. legalization for little to no cost.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.

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