Should Investors Buy Canopy Stock as Cannabis Legalization Gains Momentum?

One of the big arguments against cannabis companies is the high valuations of marijuana stocks. But lately the valuations of marijuana stocks have dropped.

marijuana cannabisTake Tilray (NASDAQ:TLRY) as an example (or perhaps a poster child!).  Since hitting $100 in mid-January, the shares have plunged to $36.30. Keep in mind that the stock’s 52-week high is $300.

Now picking a bottom is always risky. This is especially the case with a high-risk segment like cannabis.

Yet I still think there are some interesting opportunities emerging. Consider  Canopy Growth (NYSE:CGC). CGC is certainly among the tier-1 players in the cannabis world.  CGC stock price has taken a hit. But the selloff of CGC stock has been nowhere near that of many other, smaller players. Since the end of March,  CGC stock price has dropped from $50 to $40.

CGC is certainly facing some nagging issues. Managing hyper growth is far from easy. There is also the challenge of integrating the many companies it’s acquired and executing its aggressive global expansion strategy.

And last Friday, the FDA held a hearing on the implications of cannabidiol (CBD). This is a compound found in the cannabis sativa plant, which does not produce a high. The hope is that CBDs can alleviate a number of medical problems, including pain and anxiety.

It looks like the FDA is skeptical about using CBDs for dietary supplements. But on the positive side of things, it is receptive to looking at how they can be used to enhance healing.

For the most part, that is good news for CGC stock. For the CBD industry to be a success, the government must create clear-cut regulations, while the comp0und’s efficacy also has to be clear. Such developments will enable the compound to have a durable, long-term impact, boosting CGC’s results and Canopy stock in the process.

CGC has more than enough resources to deal with potential regulations, so new rules shouldn’t hurt CGC stock. And no doubt, increased regulation of the cannabis sector should lead to strong barriers to entry in the sector, limiting CGC’s competition and lowering the risks facing Canopy stock.

The Bottom Line on CGC Stock

While bad news for marijuana stocks is circulating, there are also some encouraging developments. Perhaps the most promising is the move toward legalization of cannabis for recreational purposes in Illinois. The law allows residents who are 21 or older to carry as much as 30 grams of marijuana and to grow cannabis as long as they are doing so  for medical purposes.  Other states are likely to follow in Illinois’ footsteps.

For CGC stock, these moves should be a big-time catalyst. Note that the company is in the process of acquiring Acreage Holdings (OTCMKTS:ACRGF). In the U.S.,  Acreage is the largest vertically integrated owner of cannabis licenses across 20 states, and it owns a cannabis retail store chain called The Botanist.

The deal is structured quite favorably for the owners of CGC stock. Note that it is contingent on the legalization of marijuana on a federal level. In other words, CGC should be well-positioned to benefit from the U.S. market if cannabis is legalized throughout the country.

But in the meantime,  CGC stock will benefit from the company’s growth in Canada and its growing medical business. What’s more, CGC stock price should also get a lift from Canopy’s partner, Constellation Brands (NYSE:STZ), which has invested a hefty $4 billion in CGC and will help  it with distribution, deals, and marketing.

In other words, for investors looking for a play on the cannabis opportunity, Canopy Growth stock really does look like a good choice right now.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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