Canopy Growth Is the Best Play on U.S. Cannabis Legalization

Canopy Growth (NASDAQ:CGC) stock has rallied 92% in the past three months. Much of that optimism has come in response to Democrat Joe Biden’s election victory in November.

Indoors marijuana growing, planting cannabis, holding it in a hand (canopy cgc stock)
Source: Shutterstock

Plus, Democrats have taken control of the Senate, a somewhat unexpected victory for cannabis stock investors.

However, it’s still unclear if full federal legalization is even a possibility in the next two years. But the tide of U.S. public opinion is slowly turning toward marijuana. Legalization may be closer than many investors had anticipated. And for the time being, CGC stock is the biggest, best-capitalized and best-positioned cannabis stock to benefit from U.S. legalization.

CGC Stock’s Blue Optimism

A full-on Democratic Senate victory and election sweep is bullish for CGC stock investors.

Cantor Fitzgerald analyst Pablo Zuanic says Democrats are now well-positioned to at least give U.S. multi-state operators access to a certain degree of financing they need to grow their businesses. However, those MSOs would still be operating businesses that are illegal at a federal level. They will also still be ineligible to trade on major U.S. stock exchanges for now, unless banking reform contains provisions related to U.S. stock trading.

In the meantime, any institutional investors or funds that want exposure to the U.S. cannabis space but can’t buy over-the-counter stocks must figure out the best workaround. The obvious choice is CGC stock.

U.S. Exposure

Canopy is the largest of the major Canadian legal cannabis producers based on both revenue and market share. The Canadian cannabis market has fallen well short of investor expectations in recent years. An oversupplied market has created pricing pressures. Underfunded stocks like Aurora Cannabis (NYSE:ACB) have been forced to issue repeated dilutive equity offerings with increasingly unfavorable terms.

But as ugly as the Canadian cannabis market has gotten, the U.S. market is as pretty as ever. Canopy management seemingly recognized the value of the U.S. market early on and made an aggressive move.

In 2019, Canopy announced a $3.4 billion conditional buyout of U.S. MSO Acreage Holdings (OTCMKTS:ACRHF). It later amended that buyout deal last summer to include even more favorable pricing for Canopy. The buyout is only official if the U.S. legalizes marijuana on a federal level.

The Acreage deal essentially gives Canopy a head start in the U.S. market. Acreage already operates in more than a dozen U.S. states.

In December, Canopy went back to the well by announcing another conditional ownership stake in TerrAscend. TerrAscend operates in Pennsylvania, New Jersey and California. The deal will give Canopy a 21% ownership stake in the event of U.S. legalization.

Canopy will not be starting from scratch and scrambling to market new brands in established U.S. markets once legalization occurs. Instead, it will immediately have brand recognition as soon as the U.S. moves to legalize. In the meantime, the conditional nature of the buyouts helps insulate Canopy from financial risk.

Best-in-Class Canadian Play

The conditional investments in Acreage and TerrAscend are just two examples of the savvy of Canopy management and its biggest financial backer. Global alcohol giant Constellation Brands (NYSE:STZ) has a 38% ownership stake in Canopy. And make no mistake –Constellation is running the show. Constellation even went as far as giving Canopy’s existing CEO the boot and appointing Constellations former CFO to take his place.

Constellation now has Canopy well-positioned to legally pounce on the U.S. market.

“Given its contingent stakes in Acreage Holdings and TerrAscend, Canopy Growth is arguably the best placed Canadian LP (of the six that we cover) to benefit from an acceleration in the US cannabis legalization process, in our view,” Zuanic says.

“While other LPs would presumably have to buy their way in at likely higher prices, we think Canopy would have somewhat of a first mover advantage given the contingent stakes in Acreage and in TerrAscend.”

How to Play It

U.S. MSO investors will likely argue that buying MSOs is the best way to play the existing market. That may be true. But many of these MSOs have limited access to capital, and none of them trade on the New York Stock Exchange or Nasdaq. Investors that want to avoid or are forced to avoid OTC-listed stocks must buy Canadian for now. CGC stock is the best of the best.

There is still too much uncertainty in the cannabis space to put all your eggs in one basket. I’m still recommending investors stick with a basket of at least four or five Canadian LPs and U.S. MSOs. Just make sure CGC stock is one of them.

On the date of publication, Wayne Duggan held a long position in CGC.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.

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