American voters will head to the polls on Nov. 3 to decide whether Donald Trump will have another term or Joe Biden will usher in a new era. The political banter notwithstanding, there are several important issues on the ballot, including pot. A potential Biden win will be great for the cannabis industry. That’s why Canopy Growth (NYSE:CGC) stock, along with Cronos (NYSE:CRON), Tilray (NASDAQ:TLRY), and Aphria (NASDAQ:APHA), are gaining.
When you hone in on Canopy, in particular, you will see that there are other reasons to be optimistic regarding the stock, all of which have nothing to do with the election results.
The Canadian cannabis producer has a strong balance sheet, excellent revenues, and bright prospects. In short, I believe CGC stock is a risk worth taking.
How Will the Election Impact CGC Stock?
We have to get one thing out of the way first. Whosoever wins in the forthcoming elections, the U.S. will continue on its path for marijuana legalization.
A poll from Pew Research Center last year showed that the majority of Americans supported marijuana legalization. Like my colleague Thomas Niel succinctly points out, this has become a bipartisan issue. Even if Donald Trump manages to pull off an upset, we will eventually move towards legalization.
However, if the polls turn out to be accurate, then we could have federal legalization sooner rather than later. During the vice-presidential debate, Sen Kamala Harris said a Harris/Biden administration would decriminalize marijuana. That statement alone sent Cannabis stocks flying.
In the runup to the election, I expect CGC stock to keep rising and explode if, by the eve of Nov. 3, the Democrats regain control of The White House. Some investors may think that it makes Cannabis stocks spec plays now, and they wouldn’t be wrong.
There is already talk of Biden stocks and how they are rising due to the politics involved.
Under the Hood
Undoubtedly, the elections will have a huge impact on the future of Cannabis stocks. But it’s not the panacea for all the ills of the industry. Companies with strong fundamentals will be better positioned to exploit any potential gains the industry will experience as a fallout of the election.
That’s why Canopy is an excellent bet in the current environment. It has a diversified revenue model, not totally reliant on Canada, an excellent development.
Sadly, the Canadian market has become synonymous with anemic sales. Although the country became one of the first to completely legalize the use of Cannabis for both recreational and medicinal purposes, there was a lot of euphoria surrounding the development, and companies rushed in to capitalize on it, leading to outsized valuations for several companies.
After some essential bubble bursting, we are down to only those companies that have something to offer beyond the hype. Canopy’s management deserves a lot of credit for making sure it doesn’t have all its eggs in one basket. That’s why it’s reaping the rewards, with revenues moving north of 22% year over year. Management is also cognizant of reducing costs, evidenced by the massive layoffs within the last year.
Now we come to the thorny part. Cannabis stocks are notorious for being overvalued. CGC stock trades at 16.68 times forward enterprise value-to-sales, so you cant classify it as cheap by any means. Markets have realized that the company is heading in the right direction and are rewarding the stock.
So, a case can be made that shares are trading too hot at the moment. But if you look at the big picture here, then shares seem fairly valued. Especially considering that this is the Cannabis space we are talking about. Finding a fundamentally strong company is notoriously difficult in this sector. And we are talking about a company that is quickly moving to a free-cash-flow positive position.
Bottom line: CGC stock may seem expensive, but it’s an excellent bet in the sector.
Look, at this point, no one can guarantee what’s gonna happen in the elections. Polls indicate Biden, but they’ve been wrong before — 2016, anyone?
So, you can’t invest based on a hunch. But there are enough reasons to be bullish on CGC stock, all of which have nothing to do with who is sitting in the White House after Nov. 3. I always value fundamentals over anything else, and that’s why Canopy appeals to me.
Hence, if you want to place a bet on a Cannabis company, Canopy Growth should be on your list.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.