Canopy Growth Faces More of the Wrong Kinds of Headlines

Canopy Growth (NYSE:CGC) stock has continued to slide in recent weeks. I warned previously that technical resistance threatened to sink CGC stock, and that’s what has has happened. However, not all that much has changed since I laid out the pros and cons for CGC stock in that article.

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Earnings are coming up in two weeks for Canopy, and that should be the decisive factor which determines whether CGC stock heads back to the $50s or keeps slumping. In the meantime, however, Canopy is drawing some headlines for the wrong sorts of reasons.

Huge Marijuana Bust Was Covered Up

Canadian newspaper National Post ran an investigative report about a gigantic marijuana bust in 2014. The Post obtained more than 900 pages of documents. These papers showed that the Royal Mounted Canadian Police “RMCP” planned to issue a press release about a massive pot bust.

Instead, the RMCP covered up the incident, in part because it didn’t want to hurt Canopy’s (then called Tweed) stock price. The Post reported that:

“Among the ‘strategic considerations’ outlined in emails was a concern that the release of information might affect the stock price of Tweed, which had gone public on the Toronto Stock Exchange that week — the first pot producer in the country to do so. There were also concerns that the release of information could embarrass Health Canada and expose ‘deficiencies’ in new regulations over medical marijuana production that were rolling out that same week.”

Garry Clement, who is a retired RMCP officer, said it was regrettable decision:

“When you see something like that, how can you say the RCMP is being objective? They’re playing in the hands of the company. Investors may have made a decision differently had they known the facts, he said. ‘It doesn’t give the impression of being upfront.'”

Inspector John Ibbotson suggested that Tweed’s actions represented a violation of Canada’s criminal code. Specifically, that the company had issued a false prospectus and that the Ontario Securities Commission should investigate. However, it appears that Ibbotson was overruled out of concerns for the CGC stock price and how it would make regulators look.

Police Intercept ‘Unfathomable Quantities’ Of Marijuana

The heart of the issue came down to the form of marijuana shipped. At the time, Canopy aka Tweed had permission to ship marijuana plants by air. Instead, according to the Post report, the company shipped 1,500 pounds of marijuana clippings, which was not permitted by legislation at the time. In a charmingly Canadian touch, they shipped the marijuana buds in hockey bags.

The police found about the unapproved shipments because several airlines called the RMCP to ask about the “legitimacy of transporting 1500 lbs of marijuana.” CEO Bruce Linton suggested that the mix-up occurred due to “confusion” over a change in regulatory requirements for marijuana producers. Additionally, a spokesperson stated that: “The company believed then and now that it acted in compliance with regulations.”

Marijuana Legalization Still Faces Opposition

While Canopy’s past run-in with the police hopefully won’t happen again anytime soon, it’s a reminder of how marijuana remains a frontier emerging industry. The laws and enforcement change frequently. And while some jurisdictions, like Canada, are legalizing quickly, others are not.

New York for example, appears to be a few votes short of having support for marijuana legalization. New Jersey’s legalization efforts have also stalled out. As a reminder, those are two of the most liberal states in the country. On the other hand, Illinois just approved legalization, becoming the first state to do so via its legislature as opposed to referendum. That should open a nice big market, in particular selling marijuana to tourists visiting Chicago.

Still, when generally liberal states like New York and New Jersey struggle to approve legalization, it shows that widespread approval in the U.S. is still a long way off. And, let’s not forget, marijuana possession remains a crime on a federal level. There’s no sign of that changing anytime soon.

CGC Stock Takeaway

For investors in the marijuana industry, either via ETF or individual companies like Canopy, Cronos (NASDAQ:CRON) and Tilray (NASDAQ:TLRY), it’s important to remember that marijuana’s legal status is far from clear.

A lot of governments still oppose the movement. This will be a huge problem for the industry. It seems that many folks are building capacity at a rate that assumes pot will be legal in all of North America fairly soon. But if it keeps being a slow state-by-state trickle to legalize, marijuana supply will vastly outstrip demand.

There’s also specific risk to Canopy stock here. As I noted in a previous article, Canopy has specific risk related to U.S. federal marijuana legalization. It made a more than $3 billion deal to acquired Acreage Holdings. But the deal will be shelved if the U.S. fails to legalize marijuana federally within a reasonable period of time. Meanwhile, U.S.-based operators will be able to continue expanding freely. That while Acreage is stuck with this weird structure of being controlled but not actually owned by Canopy until the government legalizes marijuana federally (if it ever does).

CGC stock could certainly pop, especially if they produce blowout earnings numbers. But with marijuana stocks continuing to slump, there’s no rush to buy CGC stock here.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

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